Loan analysis at INBS ‘next to useless’, inquiry hears

Loan book analysis at Irish Nationwide Building Society (INBS) and the grading system that underpinned that analysis was "next to useless" and did not reflect the nature of provisions required, an inquiry into alleged regulatory breaches at the building society before the financial crisis has been told.

Vincent Reilly, an audit partner with KPMG, was giving evidence on Thursday and was speaking about the financial situation of the institution in 2008. He said KPMG had told the society's management that, in the context of property price declines, the society would have to consider its credit provisions at the year end.

No detailed analysis of the material loans in the society's portfolio had been taken, he said, noting that KPMG fundamentally disagreed with a report prepared for the Department of Finance that the society's then chief executive, Michael Fingleton, had been standing over suggesting that no credit provisions were required.

Also giving evidence on Thursday was David Brophy, a non-executive member of the board of INBS from March 2006 until the spring of 2009.

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Mr Brophy noted the board of INBS was, in 2008, hoping to reduce the loan book further following a resetting of the society’s lending policy in December 2007.

Loan book reduction

Giving evidence for a second day on Thursday, Mr Brophy, under cross-examination for the institution’s former chief executive Michael Fingleton, noted that the loan book in the first half of 2008 had been reduced by half a billion euro.

“The board’s objective would have been to reduce the loan book further,” he said, noting instructions from the financial regulator to increase liquidity. Mr Brophy said great progress had been made in the first half of the year but that, as 2008 progressed, the borrowers from whom the society was trying to retrieve money were having difficulty refinancing their loans.

Mr Brophy’s evidence arose from questioning surrounding an alleged reset of policy whereby loans were not required to be approved by the board after December 2007. Mr Brophy did not recall this as being the case and noted that loans continued to come to the board after December “and they were discussed and challenged in the same way as before”.

The inquiry, which was set up on foot of a Central Bank decision in 2015 – public hearings began in December – is seeking to establish if Mr Fingleton and three other former managers were involved in seven so-called contraventions at INBS between August 2004 and September 2008.

The first module of the inquiry is looking at whether the society’s credit committee failed to adhere to internal policies by not reviewing cases of large commercial loan arrears, exposure to specific sectors or customers, or issues raised by internal audit, outside advisers or regulators.

Mr Fingleton is one of four individuals subject to the inquiry. The others are former INBS finance director John Stanley Purcell, one-time commercial lending manager Tom McMenamin, and Gary McCollum, who once led the society's UK lending activities from Belfast. The collapse of the society cost the taxpayer €5.4 billion.

Confusion over role

Mr Reilly, who audited the building society between 2004 and 2008, said in response to evidence given by Mr Brophy that there was some confusion over the role of an auditor. Mr Brophy had said KPMG could not sign off on a set of accounts unless the firm had satisfied itself that items flagged in the management letter – which sets out recommendations – had been complied with.

Mr Reilly said that was not necessarily the case and that in relation to certain controls the firm would have to have be satisfied that certain items were being dealt with. “The management letter is just a list of recommendations that we have arrived at that we present to the board . . . It’s up to the board whether they want to implement them or not,” he said.

The management letter was the focus of much of Mr Reilly’s evidence on Thursday. It set out a series of recommendations to which the society would have to respond but was not necessarily required to implement. The letter was finalised for the society’s annually audited accounts.

Mr Reilly is due to give evidence for a second day on Friday.