Colm Doherty: friends are backing him for the top job at AIB, but do their arguments stack up?

The most unlikely of bandwagons in support of AIB insider Colm Doherty becoming chief executive of the country's largest bank is gathering media momentum, if not government traction.


Former AIB directors such as Pádraic Fallon are taking to the airwaves and the letters pages of newspapers to speak up for Doherty, while other newspaper reports suggest that only Doherty is capable of revitalising the bank.


Brian Lenihan must be mystified. He takes what appears to be the populist stance of not rubber-stamping Doherty's elevation, only to find himself painted as a meddling minister trying to stop a talented executive from getting his just rewards after years of selfless service.


Those speaking up for Doherty make a simple case. To borrow a phrase from the world of crime and security, they believe he is a 'clean skin' with no links to the awful lending decisions of the last five years. The second plank of their support for Doherty is that only somebody who knows the culture of AIB can actually change it.


This second argument is the classic 'to catch a fox you need to use a fox', which hardly amounts a sophisticated piece of reasoning. However, the first argument is the one that needs the closest scrutiny.


This argument contends that Doherty is running one of the few profitable divisions of AIB's operations – capital markets. This is a division almost entirely divorced from retail banking and commercial property lending and, as a result, Doherty was not making the key risk decisions in relation to developers over recent years.


However Doherty's capital markets division, like virtually all parts of AIB, has not escaped having to put aside disastrous provisions, which in the first half of this year alone ran to €223m, compared to just €18m the year before.


In fact, far from running a division that was chalking up runaway profits, Doherty's capital markets actually experienced a profit plunge of 13% in the first half of the year due to loan impairments and less demand for investment banking services. In Doherty's defence, he did manage to drive up interest income by 40% to €579m.


Taken in broad terms, Doherty's performance at capital markets is only made to look "exceptional", to quote the AIB results statement, when set beside the disastrous results posted elsewhere in the company. For example, the bank now categorises 25% of its entire gross loan book as "criticised" – in other words, needing extra monitoring.


But the bigger obstacle for Doherty's supporters is that Doherty has been on the board of the bank since 2003 and, rightly or wrongly, boards, like cabinet government, operate on the basis of collective responsibility. They exercise this collective responsibility across a range of functions, but most crucially they have a key responsibility in the area of risk and lending.


According to Irish financial regulations, the board of AIB is supposed to understand and determine the nature and level of risk in the bank. The board is also supposed to review the adequacy of provisions for impairment losses and amounts written off. It is also supposed to set the bank's "tolerance" for risk.


The board of AIB, apart from arguably the recent appointees, clearly did a lamentable job in all of these areas and Doherty, as one of the directors, must surely share in the collective responsibility for that. Clearly his supporters take a different view.


But it is perfectly reasonable, and indeed eminently defensible, for the government to support the claims of externally-sourced chief executives as a result of this collective responsibility argument. This moderate line of reasoning is also buttressed by another argument.


Internationally, other banks that have gone as wrong as AIB have looked outside their institutions for replacement chief executives. The evidence on this score is everywhere. Stephen Hester came in from British Land to replace the hapless Fred Goodwin at Royal Bank of Scotland. After Northern Rock was rescued it brought in a former Barclays executive, Gary Hoffman, as chief executive. Meanwhile, Bank of America is reported to want outsider Bob Diamond of Barclays Capital to fill its chief executive post. It is perfectly normal – almost routine – for bank chief executives in other countries to move between institutions and to work in other markets.


In other words, there is nothing automatic or inevitable about Colm Doherty moving into the CEO position. His supporters seem to have missed that most elementary of points in their unbridled enthusiasm last week.