Ireland: Bank crisis report

Author: | Published: 22 Feb 2016
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John Breslin

On January 27 2016 a committee established by the Irish parliament delivered its report on the banking crisis in Ireland (the Report). The focus of the inquiry included the controversial decision of the Irish government in September 2008 to guarantee the obligations of all Irish banks to their creditors, including bondholders. The Report is thorough and comprehensive. While it gives some interesting insights into events at that time, in general it confirms existing perceptions of what went wrong in terms of banking regulation.

In recognising the limitations of the Report in this regard, one must take into account the constitutional constraints of this type of inquiry. The reference terms of the inquiry were set by government and the committee was staffed by members of the legislature, albeit assisted by a legal and technical team.

Furthermore, inquiries such as this are not undertaken as part of an adversarial process where positions are rigorously tested by reference to compulsorily disclosed documents and cross-examination. In Ireland, the administration of justice is reserved to the courts. This means that a parliamentary inquiry cannot conclude that certain parties were blameworthy or negligent. In addition, there are criminal proceedings underway in respect of the activities of Anglo Irish Bank, which is now in special liquidation. This also constrained certain lines of inquiry.

The Report found that Irish banks were over-exposed to the property lending sector; that the then banking regulator was structurally and culturally incapable of detecting and remedying such over-exposure; and that the global credit crunch and consequent loss of liquidity exposed the inflated value of property assets on banks' balance sheets. All of this was already known. The Report noted that law reform in particular areas was also needed. Many of these reforms have already been implemented. The Central Bank of Ireland (CBI) has been restructured into a unitary body and now has none of the baffling structural divisions that existed under the old regime. The European Union has also enacted measures to ensure that upon insolvency, a bank's creditors, such as bondholders, are bailed in to the process so that losses are not borne by member states.

One particular recommendation in the Report, however, may have significant practical effects for banking and financial services lawyers in Ireland. The Report recommended that the enforcement division of the CBI appear before a parliamentary committee at least once a year to give an account of enforcement action taken by it, and to advise of any further legislation or powers needed to address emerging risks.

If this recommendation is implemented, it will represent a major legal and cultural shift for the CBI. Current legislation governing the CBI, which has strict provisions on the confidentiality of its operations, would have to be amended to accommodate the recommendation. In terms of culture, the CBI has also traditionally operated without political influence. Any move towards parliamentary oversight in relation to its enforcement strategies would necessarily affect this. Furthermore, the adoption of this recommendation would require the CBI to take a proactive approach in identifying emerging risks that require legislative change.

John Breslin