OPINION:There was nothing in the Central Bank's 2007 stability report anticipating Armageddon, writes JOHN McMANUS.

ONE WOULD have hoped for better, but unless he has been seriously misrepresented or misquoted, John Hurley’s comments to the Joint Committee on Economic Regulatory Affairs amounts to hand-washing of breathtaking proportions.

On several occasions in the course of the committee hearing last week, the governor of the Central Bank said he and his officials gave clear and unambiguous warnings about the dangers inherent in the bank’s property-lending practices but they fell on deaf ears.

Here is one such example: “Time and again I pointed out that the interaction between an international and a domestic shock could have serious consequences for the economy.

“Time and again we indicated that debt levels were growing too fast and too strongly and that we could not continue building 70,000 to 90,000 houses.

“Our financial stability reports received a great deal of publicity. They were prepared jointly with the regulator and published. There was no hiding the message in the financial stability reports: they were public documents.

“I regularly gave press conferences, speeches and interviews in regard to these risks but behaviour did not change.”

The second point Hurley made was that the structure of the Irish Central Bank and Financial Services Regulatory Authority – to give the Central Bank its full name – was such that even though he sat on top of the pile as the governor of the organisation, he was not in a position to influence its regulatory wing, the Financial Regulator, which had the power to rein in the banks’ lending.

The clear inference here being that this part of his organisation – led by its former chief executive Patrick Neary – ignored his warnings and dropped the ball.

There are several aspects to all this that raise a few eyebrows. The first is the disconnect between the governor’s recollection and reality.

Rather than shout its warning from the rooftops as Hurley suggests, the Central Bank embedded warnings in various texts and speeches over the year, but they were by and large characterised as worst-case scenarios set against a relatively benign outlook.

The 2007 stability report – the bank's last big set-piece published just as the credit storm was breaking – is a case in point. It contained plenty of warnings but also the following: "Regarding
the main domestic development, the significant easing in residential house price growth has reduced some of the key concerns noted in last year's report. . .

“Regarding future house price developments, factors such as investors’ participation in the property market, the sustainability of current rates of immigration, the future direction of monetary policy and the performance of the labour market are all important. The underlying fundamentals of the residential market continue to appear strong. The central scenario is, therefore, for a soft, rather than a hard, landing.”

Nothing there to make you think the bank was anticipating Armageddon.

Hurley’s assertion that he could do nothing but sit back and watch while Neary blew up the Irish banking system is equally preposterous.

No fewer than seven of the 12 members of the board of the Irish Central Bank and Financial Services Regulatory Authority sit on the board of the Financial Regulator.

They include the director general of the Central Bank, Tony Grimes, and Mary O’Dea, the acting chief executive of the Financial Regulator who has taken Neary’s place.

The others are Jim Farrell, who is the chairman of the Financial Regulator, John Dunne, Gerard Danaher, Alan Gray and Deirdre Purcell.

In fact, Central Bank directors hold seven of the nine seats on the board of the Financial Regulator, known as the authority.

It’s little short of nonsense to suggest that these individuals would quietly and impotently fulminate against reckless lending while wearing their Central Bank hats and blithely sit back while the banks run riot when wearing their Financial Regulator hats.

If the Financial Regulator dropped the ball, then the Central Bank was at the end of the pass.

It’s pretty obvious the entire organisation had at least some idea of what was coming down the tracks and didn’t take action.

But in the course of last week’s hearing. Hurley did let slip, intentionally or otherwise, why this may have happened.

When quizzed as to who really had the power to rein in the banks if he – as governor of the Central Bank – could not do so, Hurley replied: “The Government and

the Financial Regulator have the power. The Central Bank certainly does not.”

On the basis that the Central Bank and the regulator are the same thing, it’s pretty clear that the problem was that the Government didn’t want to know, didn’t understand or didn’t care about what was going on with bank lending and property and the potential consequences.

But I think we already know that.