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Misjudging Risk: Causes Of The Systemic Banking Crisis In Ireland (Nyberg Report)

  • 19-04-2011 03:42PM
    #1
    Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭


    Full Nyberg report available here: http://www.finance.gov.ie/documents/publications/reports/2011/nybergreport.pdf (thanks to later10 for improved link)

    Some initial points from the Executive Summary:
    The international developments that facilitated the excesses in Ireland have been exhaustively documented in previous scoping reports. Entry into the euro area markedly reduced Irish interest rates. Banks had increased access to market funding, where cheap and abundant credit was already available owing to monetary policies in major countries as well as the increasing use of securitisation.

    Globalisation of markets and EU membership increased foreign competition in the Irish financial market, putting pressures on bank margins. A number of new, potentially high-risk retail products were introduced to the Irish market by new entrants (for example, tracker mortgages, 100% mortgages for first-time buyers). Last but not least, the paradigm of efficient financial markets provided the intellectual basis for the assumption that financial markets, left essentially to themselves, would tend to be both stable and efficient.

    International developments, however, did not in themselves cause the crisis though they helped precipitate it. The problems causing the crisis as well as the scale of it were the result of domestic Irish decisions and actions, some of which were made more profitable or possible by international developments. Though eventually unsustainable financial risks were made attractive by outside factors, there simply was nobody abroad forcing Irish authorities, banks or investors to accept such risks. The way Irish households, investors, banks and public authorities voluntarily reacted to foreign and domestic developments was probably not very different to that in other countries now experiencing financial problems. However, the extent to which large parts of Irish society were willing to let the good times roll on until the very last minute (a feature of the financial mania) may have been exceptional.

    We knew there was something special about us!

    cordially,
    Scofflaw


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Comments

  • Closed Accounts Posts: 11,298 ✭✭✭✭later12


    That link requires a login in my case; another link here

    http://www.finance.gov.ie/documents/publications/reports/2011/nybergreport.pdf

    Actually quite excited right now.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    Urgh - governance failures at Anglo & INBS, inadequate response by the Financial Regulator, leading to the appearance that the banks' actions were OK by the Regulator:
    Governance at these banks also fell short of best practice. While procedures and processes in Anglo existed on paper, in certain cases they were not properly implemented or followed in practice. It appears that, at least in the latter years, only a handful of management was aware of all activities of the bank. At INBS, a number of essential, independent functions either did not effectively exist or were seriously under-resourced.

    The Financial Regulator(FR) was clearly aware of many of these problems in the two banks. Prior to the commencement of the Period, and consistently throughout, it raised significant concerns regarding governance at INBS. It also submitted a comprehensive list of procedural and portfolio problems to Anglo. It furthermore raised minimum capital ratios for both banks. However, such remedies did not prove effective to ensure sufficiently greater prudence and accountability in either of the banks. The system-wide increase in capital charges on certain property loans in 2006, while appropriate in principle, proved too modest in a situation where property lending appeared hugely profitable.

    As a result, to outsiders, the two banks may have appeared to operate in ways broadly acceptable to the FR. This may have increased their importance as role models for other Irish banks. It must also have given comfort to leadership in the two banks themselves and encouraged them to continue with these practices.

    And so to the other banks - and that's their title, not mine:
    The Herd: Other Banks

    Bank management and boards in some of the other covered banks feared that, if they did not yield to the pressure to be as profitable as Anglo, in particular, they would face loss of long-standing customers, declining bank value, potential takeover and a loss of professional respect. The few that admitted to feeling any degree of concern at the change of strategy often added that consistent opposition would probably have meant formal or informal sanctioning.

    And the auditors:
    The Silent Observers: External Auditors

    The auditors clearly fulfilled this narrow function according to existing rules and regulations. They did not, however, generally report excesses over prudential sector lending limits to the FR. Even if they had, it appears unlikely that anything would have been done about it as in general the FR was already aware of such limit excesses.

    And the regulators:
    The Enablers: Public Authorities

    The Central Bank (CB) and the FR noted macroeconomic risks and risky bank behaviour but appear to have judged them insufficiently alarming to take major restraining policy measures. Among all the authorities a very limited number of individuals, either in boards or among staff, saw the risks as significant and actively argued for stronger measures; in all cases they failed to convince their colleagues or superiors. Thus the authorities largely continued to accept the credit concentration in the property market and avoided forcing action on the failings in the banks. The Government actively supported the market over an extended period against the apparently fairly weak but clear opposition of the Department of Finance (DoF).

    The CB was not powerless; it had the right to direct the activities of the FR and it could advise the Government. There are, however, no records of such direction or advice or even efforts at such.

    It's very readable, if you like horror. I'm afraid some people are going to be disappointed, because the ECB doesn't warrant even a cameo role as a villain.

    cordially,
    Scofflaw


  • Closed Accounts Posts: 2,819 ✭✭✭dan_d


    Do we not already know all of this??

    And has somebody given this to Bertie Ahern for a little light reading??


  • Closed Accounts Posts: 11,298 ✭✭✭✭later12


    Going beyond localised influences, even the poor old Efficient Market Hypothesis gets another rusty nail in the palm.
    Financial market and regulatory policies during the Period were influenced by the efficient market hypothesis. This paradigm was widely accepted, particularly in the US and UK, and provided the intellectual underpinning for financial innovation and reduced regulation. One important consequence of the concept was the assumption that self-regulating financial markets tended to remain stable.13
    That's a contentious couple of lines right there.

    I have to say, I love some of the classifications: the herd/ the observers/ the ennablers.... sounds like something from a Marlon Brando movie.

    Also, an interesting paragraph on assigning blame
    Assigning Blame
    ....the Commission’s remit is to identify the causes for failures, rather than to assign individual blame or responsibility. During the Period leadership as well as lower-level management and advisors changed repeatedly in most private and public institutions discussed; this makes apportioning individual responsibility for strategic or longer- term developments impractical. Most important, the nature of systemic banking crises rarely allows blame and responsibility to be confidently allocated. To understand why this is so, it may be instructive to, once again, consider the list of necessary contributors (paragraph 1.4.3 above) to a systemic banking crisis. Since all of these factors need to be present to generate a systemic crisis, stressing the impact of only one or two contributors would lack balance.
    That won't go down well.

    Also, and very interestingly, what could almost be a direct reply to Bertie Ahern's expressed desire that he wished someone had told him about the banking crisis, and which was covered quite extensively on this very board I seem to recall!
    A common argument among private and public decision-makers (both in Ireland and elsewhere) has been that “they were not told”, implying that responsibility actually resides elsewhere. However, it is an essential part of the job of a decision-maker to make sure of being well informed. Accepting one’s own ignorance or inefficiency does not transfer responsibility onto others; instead it puts an extra demand on the decision-maker to obtain good advice.
    I have to say I have mixed feelings on that position.


  • Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    ...makes interesting reading on page ix. Brian should have realized that the markets were telling him that Irish banks were over exposed to Irish property.

    No $h!t Sherlock!


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  • Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    Scofflaw wrote: »

    I'm afraid some people are going to be disappointed, because the ECB doesn't warrant even a cameo role as a villain.

    cordially,
    Scofflaw

    The EU does though, if you look hard enough. Criticism of IFRS on provisioning and loan impairment. The EU made the rules requiring all listed companies adopt IFRS (see footnote 78).

    I'd say they should pay for that! Burn the bondholders...


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    The EU does though, if you look hard enough. Criticism of IFRS on provisioning and loan impairment. The EU made the rules requiring all listed companies adopt IFRS (see footnote 78).

    I'd say they should pay for that! Burn the bondholders...

    Totally their fault:
    78 International Financial Reporting Standards, IFRS or IAS and in particular IAS 39; Financial Instruments: Recognition and Measurement. All listed EU companies were required to adopt IFRS from 2005, at which time all of the covered banks became compliant with the incurred-loss standard. Following the financial crisis, the accounting standards setters are debating the introduction of inter alia the expected-loss approach. With such a change, loan losses can be anticipated by banks through building up provisions over the life of a loan for any expected future losses. In general, pro-cyclical accounting rules tend to result in higher profits in an economic upturn and higher losses in a downturn, as compared with counter-cyclical rules which could give rise to less volatile results through the use of provisioning buffers. While constrained in their audited accounts, the banks had the flexibility to include any expected losses in their Regulatory Capital Returns to the FR.

    amused,
    Scofflaw


  • Closed Accounts Posts: 11,298 ✭✭✭✭later12


    No prizes for guessing which infamous CEO-turned-Chairman is being alluded to here. All emphasis is my own.
    Behavioural Factors
    ....The presence of a “strong personality” acting as Chairman, CEO or Executive Director was occasionally seen as contributing to this.59 Views of the bank as “family” or acceptance of silo strategies within the bank may have hindered critical thinking and overall risk assessment. Presentation of diverging views or initiatives were often not appreciated and only occasionally sanctioned.
    Seanie-Fitz2.jpg


  • Registered Users, Registered Users 2 Posts: 4,881 ✭✭✭PhatPiggins


    Did we actually pay Nyberg for this report on the glaringly obvious, well structred that it is.

    So yet again no names and no accountability :(

    Is it time for vigilante justice?


  • Closed Accounts Posts: 2,819 ✭✭✭dan_d


    Maybe they figure if they ask enough people to report on what's happened, sooner or later someone will give them the answer they really want - it's the EU's fault!! The Germans did it!!:rolleyes:


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  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    Did we actually pay Nyberg for this report on the glaringly obvious, well structred that it is.

    So yet again no names and no accountability :(

    Is it time for vigilante justice?

    The point of the report is that it's a report on the structural issues that created the problem - the idea being to avoid those issues arising again. Vigilante justice on the people who held the positions won't achieve either the reversal of the situation or the prevention of its repeat, because what people did was not illegal, and more importantly was judged to be the right thing to be doing at the time.

    Structurally and systemically, the "best" you can hope for from retrospective justice in this case is that people become more nervous of making mistakes and doing things wrong - but that just encourages groupthink and herd safety by not making controversial decisions, which was the problem here.

    cordially,
    Scofflaw


  • Registered Users, Registered Users 2 Posts: 5,932 ✭✭✭hinault


    As a general observation, I can well understand European reticence with regard to Ireland.

    What we have learned since September 2008 is that Irish politicians, Irish bankers, Irish regulators and Irish property developers caused this country's financial crisis.


  • Closed Accounts Posts: 11,298 ✭✭✭✭later12


    Did we actually pay Nyberg for this report on the glaringly obvious, well structred that it is.

    So yet again no names and no accountability :(

    Is it time for vigilante justice?
    I don't know about vigilante justice now, but certainly the terms of reference have been criticised as being too narrow from the outset. I would agree.

    I'm a particularly disappointed about how thinly examined was the decision to embark upon the original bank guarantee of September 2008. Indeed, at times, the information is a little contradictory - on the one hand the Government were supposedly not fully informed, according to Nyberg, yet on the other hand, the FR supposedly had all of the relevant information to hand the same night. I, for one, am a bit perplexed by that.

    edit:
    also an interesting comment which may have implications for any popularly anticipated criminal action against senior bank officials. From 4.1.2.
    The Commission has not and could not assess the actions or inactions of particular individuals in the authorities and did not think it was appropriate or fair to do so.... the detailed documentation that would have been needed for this often simply did not exist. Thirdly, operations of individual staff or units in hierarchical systems are likely to be influenced by a number of factors not directly attributable to the individual concerned.88 Finally, despite an organisation being led from the top, decisions tend to be taken in a complex set of personal interactions within the institution. These interactions are virtually never documented.


  • Closed Accounts Posts: 4,784 ✭✭✭Dirk Gently


    Michael Noonan said in response that people found culpable should be brought before an Oireachtas committee. How Quaint.


  • Closed Accounts Posts: 11,298 ✭✭✭✭later12


    Scofflaw wrote: »
    It's very readable, if you like horror. I'm afraid some people are going to be disappointed, because the ECB doesn't warrant even a cameo role as a villain.
    It was the IMF whodunnit!! Many will relish this.
    Nyberg 4.3.12
    Finally, the IMF Financial Sector Assessment Programme (FSAP) report on the Irish financial system in 2006 rated the performance of the FR highly. It did not call for any significant changes in its overall approach or methods. It also concluded that the Irish banking system was basically sound.


  • Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    One thing I think is interesting is in relation to the role of the non executive directors.

    We seem to be stuck in a world where Irish Plcs draw from with a very small pool of individuals sitting on each others boards which is not ideal in terms of independence, and is an issue outside the banking sector.

    The joke that was the "independent board" at DCC passing a vote of confidence in their "executive chairman" after the Supreme Court had found that he had engaged in insider trading springs to mind.

    Anyone hopeful that the government may learn this lesson from the Nyburg report and strengthen corporate governance rules? I think that the time has come for putting corporate governance on a statutory footing, and doing so may ensure greater oversight of those Irish businesses which have not (yet) spectacularly gone bust.


  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    “5.5.5. Secondly, there was a conspicuous lack of timely critical debate and analysis by bank analysts within institution and among the public at large….Doubters (the few that identified themselves as such to the Commission) in the main grew unsure over the years when nothing
    seemed to go wrong. It also appears that some stayed silent in part to avoid possible sanctions. The Commission suspects, on the basis of discussions held with a wide number of people, that there may have been a strong belief in Ireland that contrarians, non-team players, fractious
    observers and whistleblowers would be informally (though sometimes even publicly) sanctioned or ignored, regardless of the quality of their analysis or their place in organisations.”

    We get plenty of the above here on this forum with some people (points at several posters above) in any thread or post that questions the spin being spun time and time again are told "nothing to see move along" and the "situation is contained" and so on...

    ... Because the parties that got us here (and identified in the report) will somehow get us out of this mess, how dare anyone doubt them!

    Now lets all get back to the favourite sports of public servant bashing and corporate taxation distraction :rolleyes:


  • Registered Users, Registered Users 2 Posts: 1,675 ✭✭✭beeftotheheels


    ei.sdraob wrote: »
    We get plenty of the above here on this forum with some people (points at several posters above) in any thread or post that questions the spin being spun time and time again are told "nothing to see move along" and the "situation is contained" and so on...

    ... Because the parties that got us here (and identified in the report) will somehow get us out of this mess, how dare anyone doubt them!

    Now lets all get back to the favourite sports of public servant bashing and corporate taxation distraction :rolleyes:

    Relishing the irony of this post!


  • Registered Users, Registered Users 2 Posts: 2,080 ✭✭✭hallelujajordan


    nyberg wrote:
    *emphasis added

    However, the extent to which large parts of Irish society were willing to let the good times roll on until the very last minute (a feature of the financial mania) may have been exceptional.

    Professionals and non-professionals alike became convinced, and
    convinced each other, that financial markets were stable by themselves, despite historical evidence to the contrary. The implications of this conviction seemed to be in the immediate interest of the overwhelming part of Irish society. The resulting activity was something that, later on, seemed quite unsustainable, puzzling and contrary to prudential requirements and
    common sense.

    Am surprised that he didn't specifically exonerate Liam Byrne :D


  • Registered Users, Registered Users 2 Posts: 8,872 ✭✭✭Worztron


    It is all well and good for Nyberg to blame people but why did he not name all the individuals that caused this catastrophe? All of the greedy incompetents should be named, shamed and jailed. :mad:

    Mitch Hedberg: "Rice is great if you're really hungry and want to eat two thousand of something."



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  • Closed Accounts Posts: 5,451 ✭✭✭Delancey


    Worztron wrote: »
    It is all well and good for Nyberg to blame people but why did he not name all the individuals that caused this catastrophe? All of the greedy incompetents should be named, shamed and jailed. :mad:

    + 1 . A typical Irish report - fails to name a single individual , just like the numerous reports into cock-up's in our hospitals - reports peppered with phrases like '' systemic failures '' , '' communication breakdown '' , '' inadequate oversight '' , etc , but never a single person being held to account.
    But then this is Ireland - we don't ' do ' accountability here .


  • Registered Users, Registered Users 2 Posts: 5,932 ✭✭✭hinault


    Worztron wrote: »
    It is all well and good for Nyberg to blame people but why did he not name all the individuals that caused this catastrophe? All of the greedy incompetents should be named, shamed and jailed. :mad:

    Hear hear.

    We need to see bankers/auditors/regulators/directors of banks charged with financial crimes/fraud.

    The shareholders in these banks have been wiped out, the taxpayer has been left on the hook for billions, the assets of the banks have been destroyed and the country has been economically destroyed as a result of this financial/banking crisis.

    Extraordinary times require extraordinary emergency measures to be take.


  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    hinault wrote: »
    Hear hear.

    We need to see bankers/auditors/regulators/directors of banks charged with financial crimes/fraud.

    The shareholders in these banks have been wiped out, the taxpayer has been left on the hook for billions, the assets of the banks have been destroyed and the country has been economically destroyed as a result of this financial/banking crisis.

    Extraordinary times require extraordinary emergency measures to be take.

    Hard cases make bad law. The issue of individual responsibility is addressed in the report, and has the following two answers:

    1. individuals were subject to organisational pressure - the main problem was the culture and the processes rather than particular people

    2. punishing individuals will not prevent such things happening again.

    Neither of those is an argument against punishing individuals who were particularly culpable, whether through incompetency or criminality - but they are an argument that doing so will not fix the system. They are an exercise in revenge, and quite possibly counter-productive.

    cordially,
    Scofflaw


  • Registered Users, Registered Users 2 Posts: 5,932 ✭✭✭hinault


    Scofflaw wrote: »
    Hard cases make bad law. The issue of individual responsibility is addressed in the report, and has the following two answers:

    1. individuals were subject to organisational pressure - the main problem was the culture and the processes rather than particular people

    2. punishing individuals will not prevent such things happening again.

    Neither of those is an argument against punishing individuals who were particularly culpable, whether through incompetency or criminality - but they are an argument that doing so will not fix the system. They are an exercise in revenge, and quite possibly counter-productive.

    cordially,
    Scofflaw

    I'm all for putting systems and operations procedures in place to prevent these things happening again.

    However along with implementing these systems and operational procedures we need to see those who broke the law and who perpetrated fraudulent transactions and who broke sections of the Companies Acts need to be charged.


  • Registered Users, Registered Users 2 Posts: 11,203 ✭✭✭✭hmmm


    hinault wrote: »
    We need to see bankers/auditors/regulators/directors of banks charged with financial crimes/fraud.
    Incompetence is not a crime. You should read the report first before knee jerk commenting, it's a relatively easy read and contradicts your central point that this was caused by "fraud". The reports highlights poor corporate governance, poor risk management, the typical Irish failing of shafting anyone who went against the tribal thinking and utterly utterly incompetent regulation and government actions. Even so, none of these are criminal actions.

    What we need to see is people losing their jobs or being at least censured (government, regulatory authorities or private sector) for incompetence.


  • Registered Users, Registered Users 2 Posts: 5,932 ✭✭✭hinault


    hmmm wrote: »
    Incompetence is not a crime. You should read the report first before knee jerk commenting, it's a relatively easy read and contradicts your central point that this was caused by "fraud". The reports highlights poor corporate governance, poor risk management, the typical Irish failing of shafting anyone who went against the tribal thinking and utterly utterly incompetent regulation and government actions. Even so, none of these are criminal actions.

    Spare me the lecture.

    What do you call transferring funds from one lending institution to another institution to artificially inflate the deposits of that lending institution?
    Or what do you call a lending institution issuing loans to it's officer to buy shares in that lending institution?


  • Registered Users, Registered Users 2 Posts: 11,203 ✭✭✭✭hmmm


    As an aside, I had to laugh at the idea that the Asset and Liability Committee of a bank is abbreviated "ALCO".


  • Registered Users, Registered Users 2 Posts: 11,203 ✭✭✭✭hmmm


    hinault wrote: »
    Spare me the lecture.
    Alright. I'm not a moderator of course but perhaps you could go join any of the numerous threads that consist of factless emotive discussions and leave this one to discussion of today's report.


  • Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    @hinault

    Have you not got the message in the last week, first from ECB and now this?
    its quite short:
    "shut up and put up .. the situation is contained"

    There is no point engaging or arguing with the prevailing "groupthink" here,
    all that is required of you and every other taxpayer+citizen is to shut up and pay up for next few decades. Dissent and questioning is not allowed, accountability seems to have been erased from the dictionary altogether in the meantime.


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  • Registered Users, Registered Users 2 Posts: 23,283 ✭✭✭✭Scofflaw


    later10 wrote: »
    It was the IMF whodunnit!! Many will relish this.
    Nyberg 4.3.12
    Finally, the IMF Financial Sector Assessment Programme (FSAP) report on the Irish financial system in 2006 rated the performance of the FR highly. It did not call for any significant changes in its overall approach or methods. It also concluded that the Irish banking system was basically sound.

    ...because naturally we should be reliant on external bodies' views of the Irish system. Someone blaming the IMF or other outside body for the Irish crisis is deeply ironic, because the accusation implicitly accepts that the regulatory capacities of Irish institutions are negligible.

    cordially,
    Scofflaw


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