Banking Inquiry: Economist rejects AIB stress test claim

A former senior economist at AIB has rejected claims he approached the ESRI to see whether it would stress test the bank's balance sheet because a similar exercise by the Central Bank had not been robust enough.

Giving evidence at the Oireachtas Banking Inquiry on Thursday afternoon, John Beggs took issue with evidence previously given by Prof John Fitzgerald, who retired from the ESRI last year.

Also giving evidence were Pat McArdle, former chief economist at Ulster Bank, and Dan McLaughlin, former chief economist at Bank of Ireland.

The three were prominent during the boom in offering their opinions on economic issues.

Mr Fitzgerald said AIB approached the ESRI to carry out a stress test and his understanding was “they felt the stress tests [by the Central Bank in 2005] were not stressful enough . . . and they needed a proper model to do this”.

Mr Fitzgerald declined to take on the project but said it first “primed me to concerns in this area”.

However, Mr Beggs has disputed this recollection of events, and said he was “amazed” when he heard it. He met Mr Fitzgerald only once “in relation to stress testing”.

"My recollection is that I initiated the meeting, making direct contact with him, as we have been acquainted since working together in the Department of Finance in the 1970s and 1980s," said Mr Beggs, who retired from AIB in 2012.

“Specifically, I recall and am certain that I expressed no concerns on the part of the AIB board about stress testing. The board never authorised, or was aware of, the meeting. I did not report back to the board on the outcome of the meeting.”

‘Exploratory technical meeting’

He said the encounter was an “exploratory technical meeting between economists” to see if research models used by the ESRI could be used to provide a “graphic picture” of stress test outcomes.

“I never asked Professor Fitzgerald to carry out stress testing on behalf of AIB. The impression created by Professor Fitzgerald’s testimony is that the AIB board was concerned about the lack of severity of the stress test exercises as far back as late 2005, which may imply a broader level of concern. I have no knowledge of the board’s opinion on this matter.”

Mr Beggs, a former Ulster Bank chief economist who left that position in 2009, said he was “a trenchant critic of the loose fiscal policy adopted” and was “an outspoken advocate of a soft landing”.

“At the same time, I was of the view that a severe housing slowdown was inevitable and that this would be accompanied by much reduced house construction, bank lending, employment in construction and tax receipts.”

He said that “even a soft landing would have had severe repercussions and these warnings too, were ignored”.

“There would have been implications for employment, unemployment and the Budget. I had calculated that the consequence would be a reduction in tax revenue of €2 billion to €3 billion.”

About the time of warnings sounded by Prof Morgan Kelly in 2007, Mr McArdle said he estimated the number of construction jobs losses at "what now seems a modest 30,000".

Mr McLaughlin, who left Bank of Ireland in 2013, said he initially felt any correction in the housing market would involve flat prices, or falling “real prices”, with housing being relative to changes in consumer prices.

Concensus view

“The consensus view in mid-2008, which I shared, was that any US recession would be as short-lived as had been the case in the previous two, in 1990-91 and 2001.”

He said the collapse of Lehman Brothers, leading to turmoil on the credit markets, "was the second and decisive negative which hit the Irish economy and banking sector".

“We will never know how steep the Irish property correction would have been in the absence of that collapse.

“Of course nobody thought we would collapse the way we did,” he said, adding also that it was not believed property prices would continue to increase as they had. It was easy to pick out dissenting articles 10 or 15 years later from people such as David McWilliams, he said.

“The consensus tends to be right more often than not and all the contrarian views that proved to be wrong are forgotten.”