How would you cope with an annual pension of €1 million +?

The Irish financial institutions dealt with by the Covered Institutions Remuneration Oversight Committee are those that have obtained financial support from the State since 2008. They include AIB, Bank of Ireland, Anglo Irish Bank, Irish Nationwide Building Society, Irish Life & Permanent and EBS. Postbank Ireland had been included but has subsequently ceased to operate.

This CIROC members were mandated to investigate the remuneration of those in charge of these institutions and to recommend pay ceilings to the Minister for Finance – which they did in February 2009.

One facet of remuneration they investigated was pensions. They noted that cash allowances had been paid to compensate for the effects of the ‘pension cap’ imposed by the Finance Act 2006 and that it was unacceptable that pension schemes should be inconsistent with the intent of relevant legislation. The found that top management made little, or no contribution for their own pensions and that in future an appropriate balance was necessary between employee and employer contributions with the former being increased to achieve this balance. They also recommended that bonus payments should not be pensionable and that pension arrangements for top management should be at least broadly similar to those of the generality of staff of the institution.

The pension arrangements of Michael Fingleton, formerly head bottle-washer at Irish Nationwide Building Society were published by the Public Accounts Committee.

Fingleton accumulated a pension fund for himself at Irish Nationwide with assets of over €29 million when it was wound up in 2007 when Fingleton was 67 years old. A pension insurance policy was established for the benefit of Fingleton and other employees in 1975. This INBS pension scheme was originally set up in 1981, 10 years after Fingelton became connected to it. A second which was to directly benefit Fingleton was established in 1995 with the transfer of accumulated assets of €4.5 million too which a further €3.4 million was added in 2005. Various other enhancements, including serial annual pay increases of the order of 8 – 10%, were made throughout the existence of the scheme including an average of the bonus payments over the previous three years. Investments by the scheme by directed by the beneficiary.

The benefits to be provided to Fingleton include:

• His spouse’s benefit was increased from ⅔ to 100% of his pension entitlement
• The final salary, for pension purposes, was to have been the final calendar year salary – including basic salary and an average of the three prior years ‘annual bonus payments.

Fingleton’s remuneration for the final three calendar years of his employment at Irish Nationwide were as follows

Year	Salary	Bonus	Fees	Benefits	TOTAL
2006	738,000	1,000,000	48,000	50,000	1,836,000
2007	813,000	1,400,000	53,000	48,000	2,313,000
2008	893,000	1,000,000	4,000	520,000	2,417,000

His pension would therefore have been based on ⅔ of his final’s calendar year’s salary €589,380 plus ⅔ of an average of his bonus for the final three years of his employment - €528,000 providing him a potential  annual defined benefit pension of €1,117,380.

That perhaps explains why the ‘pre-contracted’ bonus of €1 million has not been repaid. Fingleton’s remuneration from 2003 until his employment at Irish Nationwide terminated was €11, 322,000

How will the Central Bank Commission earn respect among those it must impress?

The stakes for Ireland have never been higher.  Generations of Irish people are extremely vulnerable after the catastrophic and systemic collapse in September 2008 of the financial system, the Central Bank and the Department of Finance - in its role of global overseer and talent scout.

Citizens would expect that the membership of the newly inaugurated Central Bank Commission would comprise outstanding and distinguished individuals whose authentic stature and relevant experience would be an asset to the Governor and Financial Regulator. They would also be expected to act as a countervailing influence to them on the basis of knowledge, insight and most importantly, credibility. This is, after all, Ireland in reform mode and the Department of Finance demonstrating how it can pull an A-team together.

The last board of the Central Bank included a menagerie of well-meaning grandees, retirees and all sorts of extremely important, loquacious people. But they were no match for the quartet of delusionary muppets that disported themselves as the Board of Irish Nationwide Building Society.

They facilitated Michael Fingleton to obtain remuneration of €16 million from 1 January 2003 until he left Irish Nationwide (with ‘holiday pay’ of €450,000, to compensate his untaken leave), the gouging by him, in 2007, of a pension fund of €28 million leaving a residual fund of €4 million (in deficit) to cover the remaining 400 employees and, of course, his €1 million bonus that Fingleton gouged when his wretched building society was utterly insolvent.

Why did the Department of Finance choose Des Geraghty and Michael Soden to be members of the first Commission?

 

DES GERAGHTY

Des Geraghty (67) retired as President of SIPTU in 2003 and was subsequently a member of the board of the FÁS, the Cradle of Corporate Governance.

That board was stood down in disgrace this year when an investigation by the Comptroller & Auditor General revealed outrageous breaches of corporate governance resulting in large losses to the State. There have also been allegations of fraud on the part of third-parties employed to conduct training on behalf of the agency. Trainees have been unable to obtain certification for courses they believed they satisfactorily completed and an EU audit has delayed payment of funds from that source. There are therefore most serious questions about corporate governance and trust at that agency. The Public Accounts Committee have yet to issue findings on their investigation of FÁS.

It is not at all clear if Geraghty has any related education, qualifications, experience, insights or understanding of the financial industry that would commend him to serve on the board of the Central Bank Commission. His passion is poetry and he has published a couple of books.

What particular reform qualities will Geraghty be bringing in his kit bag from Baggot Street? How about credibility with the EU Commission, business process expertise and know-how, a skill in analysing budgets and overseeing subsequent expenditure? Perhaps he qualifies as the centurion guard of corporate reputation and the ‘men-in-red-braces’ who determine credit ratings, interest rates on sovereign debt, credit availability, bond spreads will be suitably impressed, despite their coldness from time to time. Those who expected to receive certificates of accomplishment for training from FÁS could be skittish about his capacity to represent the interest of the consumer in his new role.

Mr Geraghty, of course, would also have an unambiguous measure of the Department of Finance following the negotiation of the Rody Molloy ‘kiss-and-goodbye’ package (+car) and he will have observed how Pat Neary has been saved from distressing penury while the population at large are about to be pistol-whipped in the next Budget to fund his exit from College Green.

 

MICHAEL SODEN

Michael Soden seems to like the sound of his own voice and the megaphone he uses to bellow at café society.

An exponent of the ‘Why Not? Academy of Lateral Thinkers’ he suggested three days after his appointment to the Commission that if everyone in Ireland worked a 5½-day week there would be a 10% linear improvement in national productivity.

His most recent rambling was ‘Let’s quit the EU and join the US’ thus demonstrating his capacity to prostitute our national sovereignty.

The Department of Finance have now given him a pulpit and a mandate from which to bellow through his megaphone and entertain the high-polloi of the EU, the European Central Bank, the IMF, the rating agencies and the men-in-red-braces. Perhaps if a capacity to entertain was the criteria of the Department of Finance based their choice of candidate on, it is strange that they overlooked personalities such as Twink, Sinead O’Connor, Bob Geldof and Fr Brian D’Arcy as potential members of the Central Bank Commission. Given infinite reach of Soden’s wisdom perhaps Jay Leno could have enriched the Soden’s rose-tined and starry-eyed US perspective.  What can Soden offer that they could not?  They are all entertainers!

 

National Australia Bank

Soden was one the top-13 executives at National Australia Bank (The National) from 1994 to 2000. He reported to Donald Argus, Chief Executive and Managing Director from 1989 to 1999 and to Frank Cicutto who succeeded Argus in 1999.  Argus was a director of National Irish Bank (NIB) and National Irish Bank Financial Services from the time it became a wholly owned subsidiary of The National in 1987.

The High Court appointed Inspectors to investigate NIB in March 1998.   This took six years to complete and covered a series of major transgressions of company law from 1988 until 1998.  NIB was severely criticised in the Final Report of the Inspectors on the basis of findings of the utmost gravity, involving well in excess of a dozen persons, that were the consequence of a catastrophic lapse in the standards that customers and third parties dealing with any bank are entitled to expect.

The catalyst for the appointment of Inspectors was not the policing and enforcement competence of the Central Bank during the tenure of two Governors, the late Mr Doyle and Mr O’Connell. The incompetence of the Central Bank to police the Irish banks was exposed by the curiosity of two investigative reporters from RTE.

RTE reported in March 1998 that interest charges had been increased, without legitimate reason, and without customer knowledge in four branches. They also reported that customer fees had been uplifted in one branch in November 1989 without customer knowledge, or underlying justification. They stated that these practices were systematic within NIB and were motivated by a desire for enhanced profitability and career progression. It was these characteristics and values that attracted the vicarious patronage of Argus. It was these RTE reports which prompted High Court intervention less than a week later.

The matters investigated involved large sums of money and demonstrated a lack of commercial probity that cost NIB €64 million. The inspectors’ findings included:

• The opening and maintenance of bogus non-resident accounts in NIB branches enabling customers to evade tax through concealment of funds from the Revenue Commissioners
  
• Fictitiously named accounts opened and maintained that enabled customers to evade tax
  
• CMI policies were produced as a secure investment for funds undisclosed to the Revenue Commissioners
  
• Special Savings Accounts had DIRT deducted at the reduced rate, notwithstanding that the applicable statutory conditions were not observed – a curtain raiser to the establishment of the DIRT Inquiry by the Public Accounts Committee in 1999.
  
• There was improper charging of fees to customers
  
• There was improper charging of interest to customers

At no time prior to the appointment of the Inspectors did NIB address the issue of a potential retrospective liability to the Revenue Commissioners for tax arising from the irregularities in the operation of DIRT.

NIB, under the direction of its executive leadership in Australia, had therefore debased several major institutions of this State, including the Central Bank and the Revenue Commissioners and ruined the reputation of Ireland as a trusted, respected component of the global financial sector. What was discovered made Nigeria scam merchants’ seem virtuous, noble, respectable and trustworthy.

The response of The National to the appointment of Inspectors by the High Court was: “During the year (1998) NIB was the subject of investigations arising from allegations against certain parts of its operations. While involving unfavourable publicity, none of these investigations demonstrated widespread, or systematic, misconduct and the Bank will continue to work constructively with the authorities in order to resolve these matters” (The National 1998 Annual Report). These are the views of the executive leadership The National that included Soden at that time.

Major breaches of the Companies Acts seemed to have had as much impact on Mr Argus and his leadership team as an intermittent episode of trapped wind, corporate heartburn and halitosis. There was no evidence of Matthew Elderfield’s vision of intrusive supervision between 1988 and 1998 in the relationship between The National and its own wholly-owned subsidiary in Ireland.

When the Inspectors’ Report was published in 2004, after Soden left Bank of Ireland, The National issued its second press release on the subject of the NIB investigation. It stated that “the Director of Corporate Enforcement in Ireland today (30 July) released the Report of the High Court Inspectors into certain past business activities of NIB. The events go back a long time” - an antiseptic response to what transpired to be a plague of rapidly deteriorating bad behaviour as Irish banks engaged in ‘follow-the-leader’.

The Director of Corporate Enforcement was subsequently to begin a process to seek the disqualification of nine senior managers of NIB. Disqualification prevents the person concerned from acting as an auditor, director, or other officer, receiver, liquidator or examiner – or be in any other way, whether directly, or indirectly, concerned, or take part, in the promotion, formation or management of any company or society registered under the Industrial and Provident Societies Act 1893 to 1978.

Mr Justice Peter Kelly stated on 26 October 2005 with respect to NIB “the edifice of banking is built on a foundation of trust. On the Inspectors findings there was a breach of trust by dishonesty. The operations were carried out over a period of years in a deliberate fashion on the part of the Bank”.

 

Bank of Ireland

Soden was employed by Bank of Ireland from 1 September 2001 until 29 May 2004, a period of 1,001 days, for which he received remuneration of €4.79 million. He joined the Court on 11 September 2001 and became Group Chief Executive on 1 March 2002. Soden held this position until he abruptly left the employment of Bank of Ireland on 29 May 2004.

Soden’s career at bank of Ireland was generously described by Laurence Crowley, the Governor, on 29 May 2004, as “having made an enormous contribution” and having placed the Bank of Ireland “in a position of solid strength for future growth”.

During the 820 days that he was Group Chief Executive, 61% of total Bank of Ireland loans were in respect of residential mortgages, property, construction and commercial mortgages. How comfortably does this fit with Matthew Elderfield’s views on lending standards? Soden is also an example of the over-remunerated asset acquirer – who vigorously pursued Abbey National, the former UK building society, in 2002, until he was shunned.

Lending growth by Bank of Ireland to the Irish residential mortgage sector, under Soden, was achieved through increasing lending, from 12% to 20% of total loans to new Irish borrowers, in respect of properties with a loan-to-value ratio of between 91-95%.   Lending to new Irish borrowers in respect of properties with a loan-to-value ratio of 75%, or less, concurrently reduced from 53% to 45% of total loans to that category. Mortgages were also extended to British customers towards properties with a loan-to-value ratio in excess of 95%.  How does this practice connect to Matthew Elderfield’s views on risk management arrangements?

It clearly had catastrophic risk implications because the Irish taxpayer was forced to provide €3.5 billion to supplement its capital and NAMA will be taking over €12 billion in loans at a discount of 42%.

When describing the impact of his leadership at Bank of Ireland  Soden stated that “this very consistent performance is the result of focused management attention to the needs of our customers and clear strategies for growth.  The achievement of our strategic goals is also supported by an excellent credit culture, a commitment to the highest standard of corporate governance and behaviour”. (Group Chief Executives Operating and Financial Review - Annual Report 2003).

But it was his own hypocrisy that hastened Soden’s departure and the ‘embarrassment’ that he caused his counterparts on the Court of Bank of Ireland, - prominent individuals such as Denis O’Brien, Ray MacSharry, Maurice Keane and Richard Burrows among them. Is it realistic that Soden, as a member of the Central Bank Commission would be overseeing the effectiveness of the board member at Bank of Ireland who was a contemporary of his in 2004 when he ‘embarrassed’ his colleagues?

Embarrassment at Bank of Ireland, comes with a hefty price tag, which in this instance was €96 million, as reflected in the drop in share price from the 20 to 29 May 2004, when Mr Soden’s foibles with adult content on the internet during business hours came to light.

PERCEPTION OF CENTRAL BANK COMMISSION

Perception counts for much in the assessment of credibility the calibration of credit rating, bond spreads and sovereign interest rates. What credibility will this Commission have?  Why must it be necessary to waste time explaining its make-up?

Credibility made it possible for William Howard Taft to become the 10^th Chief Justice of the United States Supreme Court eight years after he left the White House in 1913 and it was not possible for Richard Nixon to emulate him 60 years later. That would also explain why senior members of the Christian Brothers order do not appear in the leadership ranks of rape crisis centres’ located in major metropolitan locations.

Irish people deserve better from their Government and their Department of Finance.  Thoughtful consideration of what is really in the national interest is like MasterCard – priceless.

Irish bank bail out costs escalate

 

The cost to the Irish State of capitalising credit institutions at September 2010 was as follows:

 

€ Billion	Cost of acquiring shares	Preference Shares	Promissory Notes	Total State Capital at Sep 2010
Anglo Irish	4.0		18.88	22.88
AIB	0.28	2.5	-	3.78
BOI	1.95	1.8	-	3.75
INBS	0.10	-	2.60	2.70
EBS	0.10	-	0.25	0.35
TOTAL	6.43	5.3	21.75	33.48

 

The cost of future assistance is estimated at €12.26 billion

€ Billion	Projected Future Assistance	Return on Investment to date	Overall State Capital
Anglo Irish	6.4		29.28
AIB	3.7		7.48
BOI	-	-0.49	3.26
INBS	2.7		5.40
EBS	0.0		0.35
TOTAL	12.8	-0.49	45.74

 

A substantial proportion of the shares in Bank of Ireland have been converted into preference shares leaving a balance of ordinary shares amounting to €1.95 billion.

The State continues to hold €3.5 billion in preference shares.

The National Pension Reserve Fund is to underwrite a placing and open offer of €5.4 billion in AIB.  If necessary, the NPRF underwriting commitment will be satisfied by the conversion of up to €1.7 billion of its existing preference shares in AIB into ordinary shares. along with a new cash investment.for the balance of €3.7 billion in ordinary shares.

The foregoing assumes that the AIB investment in M&T Bank Buffalo New York will be sold and that other assets will also be disposed in due course.  If there is a shortfall of capital by 31 March 2011 any shortfall will be met by the conversion of a proportion of the remaining €1.8 billion of preference shares. 

Future capital needs of EBS are to be met from negotiations with several parties about its future. 

Future transfers into Anglo Irish Bank and Irish Nationwide Building Society are classified as capital transfers and a directly returnable investment.

All investments to date in AIB and BOI have been provided by the National Pension Reserve Fund.

Inflated, bloated executive salaries at Irish Nationwide Building Society, despite CIROC recommendations

The response by Brian Lenihan to a question posed by Deputy Seán Barrett TD about the level of executive remuneration at Irish Nationwide Building Society was curious.  The question was put on May 12 – asking Lenihan ‘what steps he will take to ensure the Irish Nationwide Building Society complies with the recommendations made by the covered institutions remuneration oversight committee; and if he will make a statement on the matter’.  The response was “I am advised by Irish Nationwide Building Society that the remuneration of Directors and senior staff at the Society is in compliance with the recommendations of the Covered Institutions Remuneration Oversight Committee.”

This wretched building society has already reported a loss of €2.48 billion in 2009.  It devoured €2.7 billion of public money.  Ninety six percent of its €2.7 billion impaired loans relates to speculative commercial property transaction, much of it not even in this country,

The six years of delinquent financial regulation was characterised by what appears to have been a very passive relationship to this Society.  It is astonishing that the Brian Lenihan’s advisers chose to rely on information from Irish Nationwide about the issue of executive remuneration because a casual perusal of the 2009 Annual Report would suggest otherwise.

Rather light-touch, I would have thought, on the part of the Minister's advisers. The debacle that Ireland is now in is attributable to excessive reliance on the representations of this entity and its counterparts rather than vigilance, understanding and verification; an attitude more Greek than German.  The two directors representing the public interest, for example, were paid €38,000 more that CIROC recommended they be paid. 

The Covered Institutions Remuneration Oversight Committee (CIROC) report was published by Minister Lenihan on 27 February 2009 and given the crisis that prevailed then and the sense of urgency and caveats which the report  reflects, one presumes that its recommendations were to be promptly effective from 2009 financial year.

The CIROC report recognised that reduced salaries for some executives may require the revision of existing contractual arrangements; that there must be sufficient headroom between the recommended remuneration of a chief executive and the salaries of those reporting to the chief executive, such as the chief financial officer. Any departure had to be justified on case-by-case basis. It also noted that top-level individuals in financial institutions did not generally contribute to their pension funds and recommended that a review should reflect an appropriate balance between the personal contribution of all employees and that of the employer.

The CIROC report recommended the following levels of base annual remuneration in the case of Irish Nationwide Building Society:

• Chairman €144,000 (40% of chief executive's base salary)

• Chief Executive €360,000

• Ordinary board member €29,000 (20% of chairman’s fee)

• Board member chairing major committee €36,000 (25% chairman’s fee)

The Annual Report reveals:

• The role of chairman of Irish Nationwide was remunerated in 2009 within CIROC guidelines.

• The role of chief executive was paid €494,000, that is €134,000 in excess of what CIROC recommended. Mr Fingleton, as chief executive from 1 Jan – 30 April, was paid €221,000 for that period - €101,000 more than CIROC recommended.  The current chief executive, Mr McGinn, received, on a pro rata basis, €22,000 more than CIROC recommended. Mr McGinn apparently has the use of a residence leased by the Society towards which he paid a personal contribution of €6,050 from 15 Jul to 31 Dec. It is not clear if there is an undisclosed subsidy amounting to the difference between this sum and the actual rental for this period.

• Each of the current non-executive directors is a chairman of a major sub-committee of the board of the Society but the remuneration of each of them exceeds CIROC recommendation by a cumulative sum of over €68,000 - details attached.

• The role of chief financial officer which ought to attract a remuneration ‘with sufficient headroom below the remuneration of the chief executive, €360,000’ was paid a total of €539,000. This includes the remuneration of the former executive director and Secretary, Mr Purcell, who was paid €385,000 in 2009. I would question in this instance, that apart from breaching CIROC recommendations, there is information in the public domain that the records of this Society are in such a state that the current chief executive severely criticised the impact of the lending policies and practices of the previous management and that the determination of the final losses of the asset portfolio remain highly uncertain. Does this not raise fundamental questions relating to the corporate governance of this entity as the Government rushed headlong into committing €2.7 billion to it, only to realise that billions more in State funding are needed if it is to be kept on life-support.  Under what circumstances could Minister Lenihan have entertained a derogation from CIROC recommendations in the case of Mr Purcell, if one was sought, against the background of the information now in the public domain?

Readers may not be realise that in addition to the €28 million personal pension fund paid for by Irish Nationwide and received by Mr Fingleton in 2007 that he also remunerated himself in the sum of €10 million from the period our property bubble began inflating, 1 January 2003 until he departed on 30 April 2009.  This puts the €1 million pre-contractual bonus that he paid himself in 2008 in a wider context. 

Incidentally, the pension fund for the 399 staff of the Society, whose average annual pay is approximately €41,000, is €4.4 million - one seventh of the sum Mr Fingleton personally obtained.  The employees pension fund  bore a deficit of €700,000 on 31 Dec 2009.

Is the reformation of our financial system not in some ways comparable to the reform process that Mayor Giuliani deployed in cleaning up New York – where discipline started with the seemingly inconsequential issues, like removing graffiti from the subway system?  But in this instance, is compliance with top-level remuneration CIROC not a most obvious example of a similar discipline?

Fingleton’s fantasy at Irish Nationwide is all dust

The Irish Nationwide Building Society presented a gung-ho image of its achievement, ambitions, prospects and the calibre of its chief executive, Michael Fingleton, even if the language used to express this was banal and repetitive.

Massive Expansion in Lending

The increase in mortgage lending between 2003 and 2007 was 189%.  This is why taxpayers are being stalked for €2.7 billion in bailout money.  This is why such a high proportion of the assets of this decrepit building society are being dumped on the doorstep of NAMA.  This is why the Irish Government want the citizens to be subdued, indifferent and ignorant.  Ireland’s GDP grew by 36.6% from €139.4 billion in 2003 to €190.6 billion in 2007

Loan growth Bank of Ireland between 2003 and 2007 was 19%; by AIB was 37% and loan growth at Anglo Irish Bank was 37%.

The loan growth at the three Icelandic basket-case banks between 2003 and 2007 was – Kaupthing 72%, Glitner 54% and Landsbanki 57%.

At the benign end of the scale, the Swiss banks must have appeared to Fingleton to have been in a coma.  Loan growth over this 5-year cycle at UBS was 9% and at Credit Suisse

Chicken’s come home to roost

Results for year ended 31 December 2009 reported a loss of €2.48 billion, a requirement for the Irish taxpayer to provide €2.7 billion in bailout funds, a declarations that assets with a book value of €8.7 billion will be sold to NAMA and that 96% of its loan impairment provisions relate to commercial loans.

The Chairman, Daniel Kitchen stated that the problems reported are a consequence of the nature of the operation of the business which was “clearly a flawed model” and that he was sanguine about Irish Nationwide’s capacity to ‘outperform’ (wow), in the short term.  The new chief executive, Gerard McGinn, attributed the lousy performance to the “impact of the lending policies and practices of previous management”.

It is interesting to see how previous management reported their annual results from the time the credit bubble began to inflate on 1 January 2003.

2009 Results

Interest earned from loans was €529.4 million but €324 million of this has not is ‘unrealised’!  Interest paid on customer savings accounts was down 42.3% to €420.8 million.  If the ‘unrealised’ interest were never to materialise, the net interest income of Irish Nationwide in 2009 would be –€215.4 million.

A total of €4.793 billion in debt is due for repayment before 22 September 2010. How can this be accomplished?

Of the €1.189 billion owing to banks, €1.052.3 billion is repayable on demand and the balance in less than three months.

Impaired loans amount to €2.792 billion but only €105.8 million of this impairment relates to Irish residential lending.

“The final losses on the asset portfolio remain highly uncertain”  until each and ever asset is resolved.

 

Demutualisation

While there were 23 building societies in existence when the State was founded that number shrunk to two after the passage of the Building Societies Act 1989 – EBS and Irish Nationwide. ICS Building Society was acquired by Bank of Ireland where it has operated within the Ireland Retail Division – and is about to be disposed of.

One of Fingleton’s principal goals was to demutualise ‘his’ building society

1994 Annual Report: “In order to enhance all the options open to the Society we

continue to seek a change in Section 102 of the Building Societies Act, 1989. On the

basis of the new structuring within the whole State banking and financial sector through the proposed disposal in whole or in part of the TSB Bank, ACC Bank, and

ICC Bank the restrictions of Section 102 are increasingly superfluous and irrelevant.

It is positively discriminatory against the Society, especially in that the Society must

now compete, without any privileges or advantages, with all other financial institutions to whom such a restriction does not apply. It is in the interests of our shareholders and our staff that this Section be amended to reflect the new realities of the market place.”

1998 Annual Report:  “While mutuality is still a relevant concept even if the number of practitioners are reducing (there really are now only two, Irish Nationwide and the EBS) this as we have repeated often before should not be to the exclusion of other options and the Board of the Society has never presumed on behalf of its members to exclude any such option. Indeed that is why we have consistently sought to have Section 102 of the Building Societies Act, 1989 amended to enable the Society to have the same options that are available to other competing financial institutions. We hold no brief for mutuality as an exclusive option. If we were convinced that changing the corporate status of the Society was the correct option for the members and staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

1999 Annual Report “Your Society gave a commitment to review our present and future status during the year in line with market forces and developments. This review was well advanced when we were forced to pause and to reconsider the position in the light of developments in the financial markets and particularly the serious downturn in the share values of the various financial institutions. Suffice to say that everything is on hold at the moment but we will continue to monitor the situation on an ongoing basis.

We have no brief for mutuality as an exclusive option. If we were convinced that changing

the corporate status of the Society was the correct option for the members and the staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

Personal Remuneration

Michael Fingleton enjoyed personal remuneration from Irish Nationwide of €10 million and a personal pension fund in 2006 just shy of €29 million.

Fingleton’s Personal Remuneration
at Irish Nationwide Building Society

2003	€910,000
2004	€1,034,000
2005	€1,269,000
2006	€1,836,000
2007	€2,313,000
2008	€2,417,000
009	€221,000
TOTAL	€10,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors’ Report 2003:  “The excellent results we now report are the strongest yet in the Society’s long history of growth and achievement and significantly enhance shareholder value.

The Society has a strong and effective management team headed by a strong and focused chief executive (Fingleton) whose experience and expertise has produced exceptional results year after year

The Society has improved its cost income ration to a new record low of 21.43%

The Society’s plans for demutualisation have made further progress during the year (2003) and the Government agreed, at the Society’s request, to bring in appropriate legislation to enable the Society achieve a solution which would reduce the uncertainty of future ownership and greatly enhance shareholder value and give the Society the options required to do so”

Directors’ Report 2004

“The excellent set of results we now present clearly reflects the effectiveness of the Society’s strategy that has been successfully implemented and developed over many years.

The success of the Society is reflected in its strong chief executive, its excellent staff, its highly qualified and experienced Board of Directors.

The Board of the Society is fully committed to demutualisation.  The Minister for the Environment, Heritage & Local Government (Martin Cullen) issued a full statement on behalf of the Government on 16 December 2003 announcing the Government approval of a package of measures to amend the current Building Societies legislation, including the removal of the five-year barrier under Section 102.  The proposed legislation is extensive and contains several provisions to enhance the future development of building societies as independent institutions as well as removing archaic unnecessary procedures.

On 15 September 2004 the Minister, Martin Cullen,  wrote to the Society stating “my Department is at present involved in the drafting process with a view to finalisation of the legislation in the Autumn (of 2004)”.  The Board of the Society,of course, welcomes those announcements and statements but is disappointed that the proposed legislation will not materialise until later in 2005.

The demutualisation process must be managed in a prudent, professional and orderly manner in order to maximise the value for the management, staff and (lastly) members.

The cost income ratio was further reduced during the year from 21.43% to a new record low of 20.24%.”

Directors’ Report 2005

“The record results we now report are the strongest yet in the Society’s long history of outstanding growth and achievement.  The excellent set of results reflects the effectiveness of the strategy that has been successfully developed and implemented over many years.

The long awaited legislation is now being drafted and we understand will be published shortly and finally approved before the Summer recess (of 2006).

In the year under review, the Society further improved its cost income ratio to a new record low of 15.18%.

Under the strong leadership of the Managing Director together with a committed and supportive staff, backed by an informed and unified Board, the underlying value of the Society has increased six-fold in the past ten years”

Directors’ Report 2006

“The record results are by far the strongest since the formation of the Society in 1873.

The results demonstrate once again the exceptional financial strength of Irish Nationwide and clearly reflect its strong management together with the effectiveness of its lending strategy developed and successfully implemented over the years.  The Society has developed a successful business model and continues to be focused on our chosen market.

In a year which may well be the last reporting year as a building society, it is appropriate that the Society should present such an outstanding set of results.

Despite relentless opposition from some of our members’ and other vested interests’, the long awaited legislation formally became law in August 2006.  The Board decided to await the publication of the 2006 audited accounts before formally going to the market.  The value of the Society has been enhanced and the net book worth of the Society is up 27% to over €1.2 billion”.

Directors’ Report 2007

“The Board will continue to seek a purchaser for the Society at an acceptable price and will consider all the options open to it to achieve the objective and to realise the optimum value for its members and staff.

The exemplary results we are privileged to report are by far the strongest yet in the Society’s long history of growth and achievement and significantly increase shareholders value with the Society’s net book worth now in excess of €1.5 billion.

The cost income ratio is now at a record low of 10% having fallen from 14.44% in 2006”

Directors Report 2008

“ … was a disappointing year for the Society due to the disruption in global financial systems, the onset of the recession in Ireland and the UK and the resultant downturn in property values. 

Cost control has always been and continues to be a major objective of the Society’s policy.  The 2008 cost income ratio is 17% due to reduced income in 2008 rather than cost increases.

The Board wishes to thank Mr Fingleton for the enormous and unique contribution he has made to the Society over the past 37 years and wishes both Michael and his wife, Eileen, many happy years of retirement”

Directors’ Report 2009

“It is with great disappointment that I have to present to you the accounts for the year ended 31 December 2009 which reflect unprecedented levels of impairment on our loan book which gave rise to losses on a massive scale in the context of the Society.  The collapse of property markets in Ireland and abroad gave rise to the impairments but this was exacerbated by the nature of the operation of the business which was clearly a flawed model.  Final losses on the asset portfolio remain highly uncertain.  The financial results reflect the impact of the lending policies and practices of the previous management.  The scale of losses reflect the failure of the Society’s commercial lending strategy which was over reliant on asset values.  96% of the loan impairment provisions relate to commercial loans.

The Group’s customer accounts decreased by €1.5 billion in 2009 as a result of deposit outflows from the Group’s Isle of Man subsidiary and reflects concerns held by UK investors about deposit security despite the Irish sovereign guarantee.  2010 remains highly uncertain in the context of an industry seeking to define its future structure.”

Mortgage Lending and Mortgage Funding

 

	Total Mortgages €	Commercial Mortgages % Total	Customer Accounts (€ Savings)
2003	4,248,000		3,465,000
2004	5,553,000	35%	4,755,500
2005	7,572,000	32%	5,733,500
2006	10,306,000	76%	6,602,700
2007	12,281,000	80%	7,250,100
2008	10,473,900	78%	6,785,000

Requirement to boost capital of Irish banks is a huge challenge.

The nation recoils, stunned, by the scale of the NAMA enterprise.   It is interesting to reflect on the scale of additional capital needed by the five banks and building societies that are NAMA clients.  Collectively, NAMA clients’ require additional capital of  €21.8 billion by Christmas, with Anglo Irish Bank accounting for €8.3 billion of this.  This is to be provided by the State as will €3.2 billion needed by the two building societies.  But AIB and Bank of Ireland have to find €10.1 billion by Christmas.

The market capitalisation of all the companies quoted on The Irish Stock Exchange is just shy of €130 billion today.  This figure includes relatively large market capitalisation in CRH €13.2 billion, Diageo €31.2 billion, Tesco €31.1 billion and Tullow Oil €12.4 billion.

The market capitalisation of AIB is €1.05 billion and this bank requires an additional €7.4 billion.  Bank of Ireland has a market capitalisation of €1.6 billion and requires additional capital of €2.7 billion.  Irish Life & Permanent Holdings Plc, which is not a NAMA client, has a market capitalisation of €808 million.  This is the bank which coughed up €7.5 billion that distorted the balance sheet of Anglo Irish Bank on 30 September 2008.

The cumulative loan book of the five NAMA clients and Permanent TSB is over €400 billion and this includes loans made in Ireland and elsewhere.  Approximately €100 billion of the €147.2 billion of residential mortgages in Ireland is attributable to these six institutions.  This is a phenomenal scale of indebtedness and must be seen in the context of housing trends in Ireland over the past decade.

A recent UCD study of residential vacancy levels showed that there were over 345,000 vacant housing units in the country.  Allowing for 64,520 holiday homes which are vacant from time to time and a standard 5% vacancy rate which is the norm and that approximately 10,000 houses are obsolete, there are still over 170,000 vacant houses in the country that fall into the ‘exceptional’ character.

Outstanding private sector credit in Ireland, according to the latest data from the Central Bank is €365.5 billion.  It had exceeded €400 billion in October and November 2008.  While the overall level of private sector credit has been somewhat reduced, the amount of mortgage credit outstanding has remained stubbornly high – close to €148 billion since September 2008 when the Irish banking crisis exploded.

Real estate indebtedness if north of €95 billion while the construction sector owes a further €19 billion.  Agriculture and forestry owe €5.3 billion.  The manufacturing sector owes €7.8 billion. The hotel and restaurant sector, which apparently has 15,000 room in excess of accommodation demand owes €11.2 billion.

Where is the additional capital to come from when all of these circumstances are taken into account.  How many decades will it take for the Irish economy to experience a positive charge?  Comments about the collapse of Lehman Brothers and Bear Sterns are comparable to describing a hurricane in the Caribbean.  The damage inflicted on the Irish economy is due to delinquency closer to home and those who inflicted this might have the courage to own up to it.

AIB Board need to get off their vain, egotistical, stubborn arses and recruit an outsider as CEO

AIB have been flying kites about the prospect of its recently appointed Chairman, Dan O’Connor, becoming an executive chairman. O’Connor, who is also a director of CRH Plc since June 2006, became an AIB director in 2007 when the property bubble had burst. He succeeded Dermot Gleeson as Chairman some months ago.

But what would such an appointment mean for corporate governance at AIB and public confidence?  There are three and a half billion reasons why AIB need a new broom in the corner office and these have to do with sweeping away the viral influence and toxic legacies of Mr Scanlon, Mr Mulcahy, Mr Buckley and Mr Sheehy, each of which severely degraded the stature of AIB.  Being systemically important does not imply that those trusted with this ‘importance’ ought to consider themselves immune to the architecture and principles of acceptable standards of corporate governance.

Cadbury Report on Corporate Governance

The Cadbury Report on Corporate Governance was published in December 1992.  There was extreme concern at that time about standards of financial reporting and accountability and this was heightened by the closure of Bank of Credit and Commerce International (BCCI) and the Robert Maxwell saga.

BCCI was closed after major episodes of fraud and manipulation prompting thousands of creditors to sue the Bank of England for failure to properly oversee BCCI. Robert Maxwell drowned in November 1991 when he fell overboard from his yacht, the Lady Ghislaine. which has been cruising in the vicinity of the Canary Islands.  His publishing and media business collapsed as a consequence of fraudulent transaction that he perpetrated, including the illegal use of pension funds.

The Cadbury Report established a code of best practice intended to achieve adequate standard of good governance for all listed companies and those listed on the London Stock Exchange were to be obliged to state if they are, or are not in compliance.

 

Role of Chairman

The chairman’s role in securing good corporate governance
is crucial. Chairmen are primarily responsible for the
working of the board, for its balance of membership subject
to board and shareholders’ approval, for ensuring that all
relevant issues are on the agenda, and for ensuring that all
directors, executive and non-executive alike, are enabled
and encouraged to play their full part in its activities.
Chairmen should be able to stand sufficiently back from the
day-to-day running of the business to ensure that their
boards are in full control of the company’s affairs and alert
to their obligations to their shareholders.

 

Separation of Powers

Given the importance and special nature of the chairman’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power.
We recommend, therefore, that there should be a clearly
accepted division of responsibilities at the head of a
company , which will ensure a balance of power and
authority, such that no one individual has unfettered
powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board.  No such independence has been apparent on the board of AIB, Irish Life & Permanent, Irish Nationwide or Bank of Ireland who have behaved like myopic overfed sheep.  The board of EBS at least jettisoned their deadbeats promptly.

 

Recent Irish Financial Sector History

It doesn’t take a genius to understand the appalling consequences of concentrated power in two of the six financial institutions that are now standing with their begging bowls at the door of NAMA.

The overwhelming influence of Sean FitzPatrick provided him with an uncluttered platform to do what he wanted with impunity.  The behaviour of Michael Fingleton, at Irish Nationwide Building Society meant that 80% of the business of a mutual society was focused on property speculation and obscene financial self-aggrandisement on a woeful scale.

AIB has an appalling record of corporate governance which ranged from aping FitzPatrick, DIRT evasion, Insurance Corporation of Ireland collapse in 1985, flagrantly overcharging customers’, allegations of share price support for Dana Exploration through a transfer into the widows’ and orphans’ account in the AIB staff pension fund in 1988, personal tax evasion by former chief executive Gerald Scanlan, facilitation of endemic tax evasion by its own customers through illicit overseas accounts, chaotic supervision of its US subsidiary, Allfirst resulting in the Rusnak $691 million FX rip-off during the tenure of former CEO Michael Buckley, .  Everyone remembers the standards of corporate governance by these sycophants when they deferred like 18th century slaves to the whims of their KBI (key business influencer) Charles Haughey and Des Traynor 

I would be astonished if O’Connor is not an individual of the highest probity and virtue but the audacity of the AIB board attempting to subvert the wishes of the Government having stung the taxpayers’ for billions of €, is absolutely unconscionable. The destiny of this business rests with taxpayers’ not shareholders’.  The toxic corporate culture must be exterminated.  The ultimate failure of this brazen culture is in it flaccid impotence to maintain adequate core capital without State intervention and its final act of devastation was to the role it played to inflate the property bubble that collapsed the Irish economy, perhaps for a decade. 

Banks create confidence by telling good but convincing stories!

DR  STEFAN INGVES (56), Governor of the The Riksbank, Sweden’s Central Bank came to Dublin today.  The Riksbank is the oldest central bank in the world; it was founded in 1668.  It has a very focused mission – to ensure that inflation in Sweden is low and stable – 2% per annum is the golden target.  Sweden voted by referendum in September not to introduce the €.

The importance of confidence and trust

The scale and the trans-national scope of the current financial crisis, according to Ingves,  define its unique character. All crises share similar causes and common remedies but they also have many differences. When confidence is lost the taxpayer becomes the lender of last resort and the government becomes the owner of last resort!

The remedy involves regaining confidence to resolve a crisis and preserving confidence to avert further problems. The international dimension of the current crisis requires the establishment of trust across national borders trust and between authorities to strengthen cross-border crisis management.

Banks are both central to all economic activity, due to their role in the payment system, but they are also inherently unstable, due to the maturity mismatch from borrowing short and lending long. Their relatively low capital base is another potentially destabilising feature of the fractional reserve banking system.

To avoid a run, a bank must maintain the confidence of depositors and market participants. If a bank loses the confidence of its customers, it faces problems. If confidence for the entire banking sector disappears, a financial crisis is a fact.  That occurs when people are unable to make solid judgements; when they fail to understand the true quality or location of assets.

Confidence is the core ingredient of a sound bank. Confidence is essential to prevent and to resolve financial crises.

When a crisis occurs the first step is to acknowledge its implications.  Losses will not disappear and bad assets must be dealt with.

Liquidity and capital regulation need to be reformed to avert a recurrence of a banking crisis and restore trust.   However, other commentators argue convincingly that regulation alone will not prevent bank failures and Dr Ingves counterpart, the Governor of the Bank of England is one of those.   Good business succeed; bad businesses fail.  Many of the current crop of failures arose as a consequences of losses in activities that were not core to the business.  Irish Nationwide Building Society and EBS in Ireland, for example, was set up to provide residential mortgages but lost the plot when it funded speculative, commercial developments.

Get the Lemons!

Ingves advocate that to regain confidence in the short term it is vital to  get the lemons!

Banks create confidence by telling good and credible stories about the future, stories about why stakeholders will get your money back. When these stories fail to create confidence, the markets will dry up. This is basically an example of the well-known lemon problem.

The US subprime market was the catalyst of the international dimension of the current crisis although it was only coincidental to the self-inflicted fatal wounds the Irish banks inflicted on the country. The repackaging and sale of assets backed by subprime loans meant that the crisis, at its outset, had already started to impact banks internationally. Bankers exposed to subprime assets began to find it increasingly difficult to tell convincing stories. Banks and market agents became less willing to trade and to lend to each other. Rating downgrades and more bad news kept arriving and the crisis started to spread geographically and to affect more markets. Banks experienced serious funding problems.

Confidence simply disappeared and liquidity evaporated.  A melt-down of the financial system was prevented by a massive intervention by central banks and governments worldwide.
A loss of confidence is the driver of a liquidity crunch, but the lemon problem  explains the mechanics of a market breakdown. A lemon is an asset of bad quality, originally referring to poor quality cars. In short, the lemon problem arises when sellers know whether or not their asset is a lemon, but potential buyers cannot tell the difference. The risk of purchasing a lemon will lower the price buyers are willing to pay for any asset and, because market prices are depressed, owners of non-lemon assets will be unwilling to put them up for sale.

In normal times, banks can obtain short-term finance by borrowing on the interbank market and by selling assets. When it became apparent that some assets had turned sour – that they were lemons – confidence in the strength of individual banks’ balance sheets evaporates. Confidence in the banking sector as a whole was eroded, because people were uncertain as to where the bad assets were actually located and the fear one bank could adversely impact another bank.   Such uncertainty over the extent and location of lemons, coupled with a fear of contagion, are normal features of any crisis. However, the opacity of some of the new financial products and the increased interconnectedness of the financial system inflated the degree of uncertainty.

Weakened confidence between the banks led to the breakdown of interbank markets. At the same time, previously liquid asset markets completely dried up, due to the lemon problem. As a consequence, banks found it costly – or even impossible – to obtain liquidity by selling assets.

When there are lemons out and about, bankers cannot tell credible stories that inspire confidence in the future.

A precondition for the return to normal conditions, that is, to a situation where banks do not depend on central banks for liquidity, is that confidence is restored.

Central banks have been injecting liquidity for two years , but still the underlying problem – the lack of confidence – has not been fully solved. Normality and stability will not return until the impaired assets are dealt with.

To do that is both messy and costly. A difference to previous crises is the new financial products that have turned sour. It will be difficult to deal with these opaque and complicated new breeds of lemon. However, this does not make it less important to get the lemons – rather the contrary. There are no shortcuts in dealing with bad assets. The losses must be recognised. A loss is a loss. The costs involved may make it tempting to sugar-coat the lemons by letting the bad assets be valued above market value, but this will only postpone the recovery.

It is crucial for investors to realise that the bottom has been reached if confidence is to return The catalyst for this can only be achieved by a realistic and transparent valuation of assets. If the bottom is in fact reached, people will start to listen to good stories about the future again. Risk appetite will return and market activity will recover.

A lack of confidence in the banks’ balance sheets cannot be improved by creating opaque accounting rules. The book value of a bank will increase if they assign book values above market value, but will it restore confidence?  The balance sheets of banks should reflect realistic values if confidence is to be inspired.

Accounting rules should force banks to disclose what their assets are worth and not allow problems to be hidden. Lack of confidence arises over concerns about a bank’s actual financial situation. If market participants have to recalculate reported valuations, then the return of confidence will be more difficult to achieve. It is therefore important that accounting is transparent and internationally harmonised. Accounting rules are not only about preserving financial stability in the short run. Changing the accounting rules could make communication more uncertain and less transparent.

Another tool for telling stories about the future is stress testing. Stress testing can thus be a very valuable and effective tool in restoring confidence.  A track record of reasonable stress tests, will enhance the credibility of the methodology and the results has continued to increase during the crisis.

Liquidity and Capital Regulation

The financial crisis of the past two years has been very costly and must not recur.  Lawmakers, central banks and financial regulators have a daunting task ahead of them. Regulatory and supervisory reform is needed.

Liquidity or, rather, illiquidity has been in the centre of this crisis. Banks will always be exposed to liquidity risk due to the maturity mismatch, as this is a central feature of banking. However, in the run up to the crisis, this maturity mismatch increased too much. Banks relied on the misguided perception that short-term financing would be available from liquid markets. A key lesson from the crisis is that a liquid market can very quickly become illiquid.

The conclusion is that liquidity must be regulated more appropriately. Banks need to hold a buffer of liquid assets large enough to allow them to weather a liquidity shock. However, the definition of this liquidity buffer, as well as what type of assets should be viewed as liquid, requires careful thought. We should keep in mind the lesson that market liquidity can vanish quickly and be extremely cautious about what securities we consider to be liquid. Furthermore, the power to dictate the type of assets a bank must hold will have an impact on asset markets. We must ensure that this power is not misused.

From a central banker’s perspective, Ingves argues that the content of the liquidity buffer has a bearing on the central bank’s policy on what assets to accept as collateral. In a crisis, it is the central bank’s decision on which securities to accept that defines liquid and illiquid assets – at least in the local currency. Therefore, the interplay of liquidity regulation and the central banks’ collateral requirements also warrants considerable reflection.

Finally, liquidity regulation will make maturity transformation more costly.  More regulation is needed today but, in casting additional regulation, costs have also to be considered. Too strict regulation would stifle competition, make financial services more expensive and, in the long run, hamper economic growth. On the other hand, too loose regulation would inspire speculation with taxpayers’ money and also reduce economic growth. Thus, the extent of financial regulation is – at least partly – a question of society’s risk tolerance.

Liquidity buffers will create a cushion. However, the root of a liquidity crunch is a lack of confidence. A major aim of regulatory reform should thus be to ensure that trust does not dissipate so rapidly and completely again. In order to do this capital requirements need to be increased, both in terms of the quality of capital and the amount of capital.

Increasing the quality and amount of capital will increase the resilience of individual banks. In addition, strengthening the ability of banks to absorb losses – therefore more and better capital will also strengthen the resilience of the system.

In Ingves view, the important part of capital is loss-absorbing common equity. In addition, other forms of capital are needed to protect the state. If a bank defaults, capital typically evaporates very quickly. I have seen many examples of banks that have defaulted because they did not meet the capital adequacy rules. I

Building trust to enhance
cross-border crisis management

A financial crisis is costly to resolve. The crisis in Indonesia cost the equivalent of 50% of its GDP.  Growth is stymied for years.

The potential costs are so large that only the nation state, through its power to tax, can shoulder the costs. This makes the state the only ultimate and credible guarantor of financial stability.

Option #1
Today, there is a mismatch between the geographical reach of the only party that can guarantee financial stability – the state – and the international financial system. The logical solutions to this geographical mismatch are either to shrink the financial system back to within national borders or to create an international institution with a right to tax or a system of burden-sharing, so that confidence in an ultimate guarantor can be established on an international level.
The first solution would be too costly. Basically, it would imply rolling back decades of globalisation and financial integration. It would also mean a serious blow to the European single market. In a way, I find it puzzling that we are discussing the possibility of a single market for all kinds of goods and services except for the commodity most suited for free trade: money.

Option #2

The second solution would involve a possible European wide tax to pay when a major SNAFU occurs.  But since taxes are determined at a national level there is no scope for pan-European taxes determined at an EU level.

Consequently, the geographical mismatch continues and, as a consequence, cross-border banks pose a real challenge to crisis management. To accommodate this mismatch, national authorities must cooperate more effectively. This is the only feasible option. In order to achieve efficient cooperation, it is vital to build trust between authorities, which explains my third ingredient.

Option #3

The third and only practical option is based on cross-border cooperation.  But cooperation is required in good times as well as bad.

In the EU, there can be  the home country principle as a fix for the geographical mismatch.  But this involves a partial loss of sovereignty at national level to achieve this compromise.

However, the home country principle does not solve the dilemma of international banks and national authorities. Tension arises because the home country is responsible for the supervision of branches but the host country is responsible for the financial stability of the country. This tension also persists if the foreign bank operates through subsidiaries. Many cross-border banks centralise different parts of management. There are good economic reasons for such centralisation. However, the implication is that the home supervisor, as the consolidating supervisor, has the overall picture, while the host country has the responsibility.

The capacity to respond to cross-border crisis management is impeded by a lack of mutual trust. In bad times, trust is essential for sharing information. Reaching a joint assessment and making efficient decisions often require frank and open-hearted discussions. Such discussions will not take place if the parties do not trust each other.

 

Nordic approach to trust building

The Governors of the Nordic countries have built trust for a long time. This building of trust dates back to the 19th century. Although it is not very widely known, in 1873, Sweden, Denmark and Norway formed a monetary union based on the gold standard. This union was eventually dissolved in 1924. However, I believe that one legacy of the union has been that the Governors of the Nordic Central Banks – adding Iceland and Finland to the group – have continued to meet regularly since then. This tradition of regular meetings has built trust. It has taken some time, but today the trust is there.

The Nordic example shows that trust between authorities can be achieved, but that trust takes time to build – so patience is warranted. At the same time, we need to start getting this process going immediately.

Financial stability ultimately depends on taxpayers.  Bank defaults are rare but there is still a low frequency of them arising and these are uninsurable events.  The costs arise in direct support and the lost opportunity to achieve economic growth.

Inges 6-year term as Governor began in January 2006. Dr Ingves is a member of the ECB General Council and a member of the Board of Directors of the Bank for International Settlements (BIS). He is also Sweden’s governor in the International Monetary Fund.

GDP falling and incalculable obstacles to recovery

THE Government is suggesting that the latest data on the performance of the Irish economy, which indicates a contraction so far of 7.4% in GDP, was as anticipated last April when the second Budget was introduced and that a slight increase in merchandise exports of €20.79 billion (+€154 million) from multinational companies in the second quarter reflects an encouraging sign.

One quarter of the merchandise exports comprise computer software that was not incorporated as part of computer hardware or physical media but separately transmitted by electronic means.

Outward direct investment from the International Financial Services Centre was €5.73 billion in Q2.

Some €4.77 billion was reinvested in Ireland by multinational companies and this was combined with an investment €12.56 billion brought directly from overseas.

Exports to EU predominate

The EU is the destination of 63% of Ireland’s merchandise exports and 66% of exported services. 43% of merchandise exports and 39% of exported services are despatched to € countries.  The exhortations of the UK Independence Party in connection with The Lisbon Treaty neatly avoid this fact.

Increasing Dependency

The population of Ireland has risen to 4.45 million, an increase of 38,000 in the 12 months since April 2008 despite the emergence again of net outward migration – of 7,800 persons. The increase is accounted for by a record birth rate. This trend will enlarge the dependency ratio and requirement for resources in education.

Unascertainable impact of Banking Crisis on recovery

The media are absorbed by the ramifications of NAMA. But I find it instructive to view this banking crisis in a broader context because that is what will define our prospects for economic recovery.

The last time the banking system was in relative equilibrium was 2002, the year before the € became our everyday currency and the year before The Financial Regulator was established.

Our GDP, at constant market prices, is likely to have grown by 82.4% from €94.3 billion in 2002 to an anticipated €172 billion at the end of 2009.

Six financial institutions (AIB, Bank of Ireland, Irish Life & Permanent, Anglo, Irish Nationwide and EBS) accumulated customer deposits of €1.025 trillion but they collectively lent €1.543 trillion - €518 billion more than their collective deposits in from 2002 to 2008, financed by money raised on international markets.

The Central Bank provide a sector breakdown of outstanding credit each quarter. While, not surprisingly attention is drawn to the €96 billion owing by the real estate sector and €21 billion owing by the construction sector, the growth in personal borrowing of over €80 billion is bound to hit Skid Row in a deteriorating economy.

The growth in borrowing by manufacturing was quite moderate at under 75% given that it is from this source that exports and employment are generate. The following table sets out the main changes:

The following table illustrates that while Ireland’s GDP grew by 82.4% private sector credit expanded by 175.3%.

	March 2009 € Million	Change 2002-2009 € Million	% Change 2002-09
Agriculture and forestry	5,457	2,304	73.1%
Fishing	386	100	35.0%
Mining and quarrying	575	334	138.6%
Manufacturing	8,571	3,665	74.7%
Electricity, gas and water supply	1,251	423	51.1%
Construction	21,285	16,788	373.3%
Wholesale / retail	14,053	8,776	166.3%
Hotels and restaurants	11,437	6,267	121.2%
Transport, storage and communications	3,347	1,363	68.7%
Financial intermediation	86,164	46,035	114.7%
Real estate	95,987	78,780	457.8%
Education	753	386	105.2%
Health and social work	2,787	2,232	402.2%
Community, social and personal services	2,967	1,773	141.8%
Personal borrowing	136,381	79,978	141.8%
TOTAL PRIVATE SECTOR CREDIT	€391,401 M	€249,204 M	175.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Response of The Financial Regulator

 

The Chairman of the Regulator stated in his 2008 annual report  stated “our strategic approach to regulation was framed in a much more benign environment but that the Regulator had taken steps to slow bank lending, in particular in 2006 and again in 2007”.

 

The first chief executive of the Regulator, Liam O’Reilly, stated in the 2005 annual report “along with the Central Bank, we are concerned about the rapid rise in the levels of indebtedness in the economy and are well aware that if conditions change adversely, many people could be severely affected. We monitor and require institutions to anticipate and prevent risk issues now rather than to have to address problems down the line. There has been much debate about high loan to value ratios in recent days for mortgage borrowers. In this debate, the critical issue is the ability of borrowers to repay the loan in full. It is the responsibility of each financial institution to ensure that their credit standards, provisioning policy and levels of capital are appropriate to provide not only for today, but, in the event of any future downturn in the market. So long as the quality of credit is maintained and the ability to repay is not compromised this is not a problem. We have a responsibility to inform consumers which we are doing through our publications, which set out the risks and benefits of various financial products, including mortgages and personal loans.”

 

O’Reilly’s focus seems to have been more acute when it came to securing his next sinecure.  He became a director of Irish Life & Permanent Plc last September just before a banks that had customer deposits of €12.9 billion was to provide €7.5 billion to masquerade the balance sheet of Anglo Irish Bank on 30 September 2008.  He was presumably recruited as an authentic advocate of financial regulation compliance but in March 2009 the same bank was fined €600,000 by the Regulator for serious infringements.  Does this mean that O’Reilly is as effective as a director of this bank as he was when chief executive of The Financial Regulator.  His ability to control and regulate the imbeciles that took over the asylum as not unlike that of a police riot squad wearing pink bedroom slippers (with ribbons, of course).  The reasons for the fine have not been disclosed.