Ulster Bank lost 10% of deposits following blanket guarantee

Ulster Bank lost about 10 per cent of its deposits following the introduction by the State of its blanket guarantee for domestic banks on September 29th, 2008, former chief executive Cormac McCarthy told the Oireachtas banking inquiry.

This was equivalent to €2billion to €3 billion, he said, and was the result of the government introducing the “best guarantee in the world” at that time.

As it was owned by Royal Bank of Scotland in the UK, Ulster Bank was originally excluded from the guarantee. Mr McCarthy said it was encouraged by RBS to apply for inclusion to stem the outflow of deposits and because it regarded Ulster Bank as of systemic importance to the market here.

Mr McCarthy confirmed Ulster Bank did apply to be included in the guarantee but this was overtaken by events when the UK government bailed out its banks, including RBS, in October 2008. “Our immediate stress was resolved,” he said.

Mr McCarthy said late former minister for finance Brian Lenihan attended an Ulster Bank event on September 30th, 2008, having spent the previous night deliberating on the guarantee at Government Buildings. Mr McCarthy said this was the first time he had met Mr Lenihan, and he spoke to him before the event about the impact the guarantee was already having on Ulster Bank.

Financial crash

He had earlier apologised for not anticipating the financial crash and for relying too much on certain economic assumptions in the years before 2008.

“I never anticipated the circumstances that transpired in 2008 and beyond and I was mistaken not to have done so,” he said. “I greatly regret that decisions I made while CEO of Ulster Bank have had the impact they have had on so many people’s lives.”

Mr McCarthy detailed how Ulster Bank had acquired rival First Active in January 2004 with a view to becoming a third banking force in Ireland behind AIB and Bank of Ireland.

“In a nutshell, the bank’s strategy was to grow all aspects of our retail business and corporate business throughout Ireland . . . availing of strong economic conditions and positive indicators.” He said Ulster Bank lent too much money to too many people on the basis of assumptions that turned out to be “seriously flawed”.

“What is clear is that our strategy, while genuine in its motives and ambition and backed by one of the world’s biggest banks [RBS], was ultimately proved to have been ill-judged and mistaken.”

Detrimental move

On Ulster Bank’s role in pushing 100 per cent mortgages from July 2005, Mr McCarthy said that, with hindsight, it was a “detrimental initiative”.

He said the market share of its subsidiary, First Active, among first-time buyers was under pressure. Its move to publicly market 100 per cent mortgages was a response to moves by rivals to “stretch loans-to-value to 100 per cent or more” and the fact many customers were using expensive short-term debt, such as credit cards, to finance their deposits.

Mr McCarthy, now the finance chief at Irish bookmaker Paddy Power, said the policy was notified to the regulator.

He said Ulster Bank and First Active wrote about €1 billion worth of 100 per cent mortgages for 4,000 customers in the three years to mid-2008. This did little to change the bank’s overall share of mortgages from 16 per cent, he added.

Mr McCarthy declined to answer questions relating to Ulster Bank loans to developer Seán Dunne for his purchase of two hotels in Ballsbridge. He said the transactions were the subject of legal proceedings.