THE GOVERNMENT’S budgetary policy in the years leading up to the crash is expected to face criticism in two reports into the banking crisis which will be presented to the Cabinet today.
The Central Bank and the financial regulator come in for much stronger criticism in the reports, which will be published after they have been considered by Ministers.
One of the reports was written by the governor of the Central Bank, Prof Patrick Honohan, and the other by international banking experts Klaus Regling and Max Watson. The reports are due to form the basis on an inquiry into the banking crisis, which is expected to be put in place by the end of this month.
The Regling/Watson report examines the policies pursued before the crisis struck, and it concluded that successive budgets played a part in overheating the economy at the wrong time. The budgets drafted by Brian Cowen while he was minister for finance come in for criticism by the authors.
After a meeting of euro group ministers in Luxembourg last night, Minister for Finance Brian Lenihan declined to comment on the content of the reports.
“There will clearly be economic lessons in these reports, which we all have to heed,” he said.
The report by Prof Honohan is primarily concerned with regulation, but it also looks at Government policy.
It is understood that he points to Government fiscal policy and the tax incentives introduced in a number of budgets as contributory factors to the boom in bank lending and property investment.
Prof Honohan also looks at the Government’s controversial bank guarantee scheme which was introduced on the night of September 29/30th, 2008.
The governor concludes that some kind of scheme to cover bank liabilities was necessary given the stress in the financial markets at the time and the risk of a banking collapse.
He is expected, however, to question whether bank subordinated debt, a type of funding provided by investors for a risk premium, should have been included in the guarantee on the same basis as senior debt and bank deposits, which earn a lower rate of return.
Mr Honohan paints a picture of the panic that night that a full-scale banking collapse was on the cards.
He looks at the two meetings involving the Bank of Ireland and AIB chiefs with the taoiseach and the minister for finance during the night, one before the guarantee was decided on and the other after the decision was taken.
The strongest criticism in the Honohan report is reserved for the financial regulator and the Central Bank.
He says the regulator was far too lax in exercising his functions and failed at times to follow through on directives given to the banks. He is also criticised for moving too late to impose new rules to ensure that the banks had more capital to cope with the impending crisis.
He also says the regulator was far too benign in the operation of his functions, and far too accommodating of the desire of the banks to chase short-term profit and market share.
The Central Bank also comes in for criticism for failing to spot the danger signals as the banks increased lending using money borrowed from overseas institutions.
The bank had the responsibility for the overall stability of the financial sector, and Mr Honohan is strongly critical that it did not sound the warning bells much more loudly as the bank balance sheets expanded at a rapid rate.