Central Bank governor John Hurley retires at the end of the summer, having extended his seven-year term by six months. Last week, presenting his last Central Bank annual report, he said the bank warned "clearly" about the huge risks facing the economy from property lending. He said he told successive press briefings that the "fundamentals" of the economy did not justify high property prices.

"All the risks were outlined," he said. Despite the repeated warnings, "a gap emerged" and "behaviour" was unchanged.

He became governor in March 2002, just as lending at the regulated Irish banks was about to explode. In the following five years the loan book of Anglo Irish Bank surged. Its top management had set their sights on becoming the largest property lender in Europe by 2012. Allied Irish Banks and Bank of Ireland also doubled their loan books. Famously, an ex-banker said Bank of Ireland, by its lending, had done in five years what had taken its first 200 years to achieve.

Around the start of Hurley's term, the regulatory structure split between the Central Bank and the Irish Financial Services Regulatory Authority, or the Financial Regulator. The regulator was the front-line supervisor of the banks, but the Central Bank still headed the supervisory system.

Over the years, the Central Bank focused on personal indebtedness, including the high level of mortgage debt, as residential prices soared to the highest in Europe. This, of course, was not happening in a vacuum. International newspapers in 2006 reported that Dublin houses were among the most expensive in the world, with prices rivalling those paid for prime Manhattan properties.

The Sunday Tribune has looked back at the past five years of Central Bank reports. The Central Bank did indeed repeatedly issue warnings about house prices. Many other forecasting bodies, including the Organisation for Economic Cooperation and Development, had identified the risks of a residential property crash here in 2006.

However, many of the Central Bank warnings were not precise. In focusing on residential property lending, the warnings did not identify alarming facts about the concentrated lending to property developers. It was their commercial property loans after all, not their residential home loans, that broke the banks. In a short period, the 100 biggest property developers borrowed €40bn, equivalent to the government's revenue last year.

Evidently, the warnings were not clear. A warning about construction in 2006 accounting for up to 15% of GDP came far too late. Despite the warnings, the Central Bank had little authority in changing the behaviour of borrowers and, more importantly, government. Despite its authority, it was ignored.

'Need for high lending standards'

John Hurley was appointed governor in March 2002. Significantly, 2001 and 2002 had marked the aftermath of the popping of the dotcom bubble. In response to the stock market slide and the 11 September attacks on US cities, the Federal Reserve cut interest rates, and rates worldwide fell to match historic lows. In Ireland, an interim IFSRA board had been appointed to set up the twin supervisory pillars of Central Bank and Financial Services Authority of Ireland. Iraq was invaded in March 2003.

Presenting his first annual report (for 2002) in the summer of 2003, Hurley by the third paragraph had delivered his first warning about inflation. A few paragraphs lower, he warned about lending.

"The substantial growth in lending for property at a time when the property market is tending to slow is a cause for concern," he said. "I wrote to the chairpersons of all lending institutions some months ago to remind them of the need to maintain high lending standards in relation to residential and commercial property. More recently, we have recommenced on-site inspections of lending procedures."

In the report's economic analysis section, the bank warned that "a resumption of rapid house price inflation could pose considerable risks to the banking sector" as a "pick-up in growth was fuelled by increased demand by investors due to favourable budgetary tax changes and pent-up demand on the part of first-time buyers".

A year later, in the summer of 2004, Hurley presented the bank's 2003 annual report. In the third paragraph of the review he warned about house price inflation.

"House prices continue to increase at a rapid pace – 14% for new houses nationally in 2003 – notwithstanding strong supply increases… It is clear that these rates of increase must be reduced soon to a more sustainable pace," he said. It was not made clear what measures the Central Bank had in mind to reduce home loan lending.

The economic analysis section reported that the economy had weathered the global slowdown and the bursting of the dotcom bursting "reasonably well" but added: "A continuing source of concern to the bank is the protracted and continued rise in the price of housing… with new and second-hand house prices averaging €224,567 and €264,898, respectively, in 2003." There was still, at this stage of the housing price bubble, no explicit warning about lending to property developers.

In May 2004, the Central Bank hosted European Central Bank president Jean-Claude Trichet, who commended Ireland on reducing its government debt from 113% of GDP in the mid-1980s.

In the summer of 2005, the Central Bank presented an upbeat 2004 annual report on the economy. Growth in 2004 was about 5.5%, unemployment was only 4.5% and inflation had eased to 2.3% on the harmonised measure that excluded a few items like monthly mortgage payments. Even the governor's now traditional warning about house prices had an upbeat tone.

Optimism about a soft landing

"There is now considerable evidence of an easing in the rate of house price increases, which is in line with very strong housing output growth in recent years," Hurley said. "The most recent quarter-on-quarter changes in house prices correspond to an annualised rate of increase of around 4% which, if sustained, would represent a considerably lower rate of house price inflation in 2005 than in recent years." Prices had risen in 2004 by 11.25%.

A year later, in the summer of 2006, the bursting of the property and banking bubbles was approaching. Presenting the 2005 annual report, the Central Bank struck a graver tone.

"Downside risks to the economy include the recent acceleration in house price increases and the continued strong growth in credit. Developments in the international and domestic economy are discussed in more detail in the Economic Overview chapter," it said.

In that section, the bank estimated that construction employment accounted for about 13% of all jobs, "an exceptionally high fraction by international standards".

In its most explicit warning about tax, it warned the government that, instead of cutting taxes, it should be raising them. It was probably too late because the banks' loan books had already swollen.

In summer 2007, Hurley presented the bank's 2006 report. "The overall picture of the Irish economy is positive but there are some aspects that cause concern," it said. "Growth remains unbalanced, driven disproportionately by domestic demand, and the strong rate of growth has contributed to inflationary pressures. This, in turn, is affecting Ireland's competitiveness, particularly since the domestic price level is already the highest in the euro area."

In the main economic review, the Central Bank appeared to hope that house prices would moderate. "Most notably, activity in the house construction sector appears to have peaked last year," it said. The report was optimistic about a soft landing. "The prospects for the economy in 2007 and 2008 are generally positive but there are risks to the outlook."

Last summer the Central Bank delivered its 2007 annual report. It warned that growth would slump and unemployment rise but there was no sense of the looming disaster.

"The Irish financial sector was, of course, impacted like all others by these global developments. Medium- to long-term funding was not as readily available on wholesale markets as had been the case. However, Irish banks have negligible exposure to the subprime sector and they remain relatively healthy by the standard measures of capital, profitability and asset quality confirmed by the stress testing exercises we have carried out with the banks," it said.

Appropriately, the annual report had a full-page picture of Jean Claude Trichet with his arm wrapped around John Hurley's shoulder. The Irish banks, and the economy, would soon need the continuous support of the ECB to keep from going under.

Pay King How John Earns More Than Mervyn And Ben by Emmet Oliver

As Colm McCarthy and his An Bord Snip Nua colleagues were suggesting ways for the state to save €5.3bn last week, the Central Bank had already published its annual report for 2008. It showed that governor John Hurley was collecting a salary of €369,078. This was after taking a pay cut of 10%. Adding back in the 10% would have given Hurley a salary of approximately €400,000. He is also given the use of a car.

The performance of the Central Bank in 2008 could hardly be regarded as exemplary when one considers the revelations concerning bank capital adequacy levels and reckless lending. Its warnings in its various bulletins last year were also wholly inadequate considering how deep the subsequent plunge was in the Irish economy.

Despite this, the cost of the Central Bank hugely increased in 2008 from €115m to €135m, with staff costs rising to €82.8m from €76.6m. While the increased workload on the bank cannot be denied, the organisation hired in much of its expertise to deal with last year's banking problems.

For example professional fees increased by 146% to €7.2m, most of it consisting of advice on the operation and design of the government guarantee scheme.

The ultimate judgement on the Central Bank's senior pay practices has to be made against its international counterparts. The governor of the Bank of England, Mervyn King, was paid £297,920 according to the bank's last annual report. This is equal to €346,582, more than €20,000 less than John Hurley's salary. The gap between Hurley and US Federal Reserve chief Ben Bernanke is even more pronounced, with Bernanke getting a salary of $191,300, which is €135,508.