Patrick Honohan: regulators showed an 'unduly deferential approach' to banks

Garret FitzGerald had taken to his bed. It was Friday 8 March 1985, and the Taoiseach was suffering with a serious dose of the flu. The night was closing in when there was a knock on the door of his home. Outside were finance minister Alan Dukes and the minister for Trade, Commerce and Tourism, John Bruton. They wore faces as long as that on the suffering Taoiseach. Their tidings had the potential to completely undermine the state's shaky financial edifice.

Earlier that day, executives in Allied Irish Bank dropped a bombshell on the Department of Finance. The bank was no longer willing to prop up its insurance subsidiary, ICI, which was haemorrhaging millions of pounds. It was going to allow the insurance company go to the wall. The consequences would be the possible demise of AIB itself. The bank was putting it up to the government. Save us to save the country.

Within a week, the government had taken over ICI, saved AIB from further losses and possible ruin. Taxpayers would have to clean up a mess created by buccaneering bankers, whose pursuit of profit had lurched into recklessness. The night that the government announced its rescue plan, executives in AIB held a celebratory drinks party.

The following year, AIB posted an after tax profit of £80m. From the point of near collapse, it sailed off into rude health while the state picked up the tab.

The rescue of ICI 25 years ago should have been the starting point for an inquiry into the banking collapse of 2008. That event set a standard. It signalled to the banks come what may, once their fortunes were tied to the state, the taxpayer could be relied on to foot the bill. Risk simply didn't enter the equation.

A few years after the ICI debacle, the banks were at it again, screwing the state to pump up profits. The bogus non-resident accounts scam really took off in the late '80s. Banks facilitated the illegal depositing of hot money in bogus accounts beyond the reach of the taxman. In addition, DIRT on deposits was evaded with the assistance of the banks.

The mugs picked up the tab. At a time when services were stretched beyond the limit, when patients routinely died on hospital trolleys, hundreds of millions of pounds were being salted away in Irish banks. Profit levels in banks continued on an upward trajectory.

When the scam was uncovered, the banks had to eventually cough up, but it was a token gesture. For example, AIB was handed a bill of nearly £100m in 2000. In the same year the bank garnered pre-tax profits of £1.25bn.

There were many other banking scandals over the last 20 years. Bank executives had their personal tax evasion off-shore vehicle, Faldour. National Irish Bank scammed huge sums from its off-shore scheme, which was uncovered by RTE in 1998. Dozens of overcharging scandals came to light.

Time and again, banking was shown to be a business that required tight policing to protect the pockets of both consumers and the state. Yet successive governments deigned it appropriate to apply light touch regulation. It was akin to fixing up a paroled kleptomaniac with a job as a bank teller.

The report into the current crisis written by Central Bank governor Patrick Honohan referred to regulators showing an "unduly deferential approach" to banks. This, he wrote, "may have contributed to a reluctance to second-guess bankers in any aggressive manner".

How could it have been any other way? For at least 25 years, governments have been showing undue deference to banks. Recidivist activity did not set off any alarm bells. The political culture demanded that banks be allowed free rein irrespective of their records.

The administ­rations led by Bertie Ahern accentuated this approach. There was a confluence of interests between the government and financial institutions.

Both were concerned primarily with the short term, either re-election to power, or the annual profits that would boost share price and reap more easy cash for anybody who was aboard the good ship. There was to be no rocking of boats.

What would have become of the regulator who shouted stop? Would a minister, or an emissary, have had a word in his shell-like, letting him know that the national interest demanded that banks run wild?

Honohan also refers to an attempt to formalise some of the principle-based regulation – in other words, to tighten things up – yet this was shelved following lobbying by the banks. Quite plainly, Brian Cowen's ears were open and receptive to anything the banks required in order to boost profits.

As late as 2008, Cowen had appointed an expert group consisting mainly of bankers to draft new light touch regulation. The minister was outsourcing policing to representatives of the institutions.

On 27 March 1985, John Bruton addressed the Dáil about the ICI debacle.

"The problems which have come to light in this case clearly raise the most serious questions about the role of management, directors, shareholders and of auditors of companies.

"The chain of responsibility is clear. The primary responsibility for ensuring the satisfactory conduct of company affairs lies with the shareholders and is exercised through the directors and management of the company. The secondary responsibility for the correct presentation of the financial activities and standing of any company rests on the auditors."

His words could have been lifted from either of the reports published last week. Same as it ever was. Now we are expected to believe that all has changed utterly. Really? What do you think?