The Central Bank and
National Crisis
This is a summary of Daire O'Criodain's article published in the Spring 2009 issue of Studies. The full text of this article can be ordered by clicking on "add to cart" button above. A PDF file of the article will be sent to you by email.
The underlying cause of our financial crisis is the fact that the banks quite simply over-lent indiscriminately (as the Central Bank in its most recent Annual Report diagnosed in relation to banks elsewhere).
Ireland’s economic success had given us a high-octane injection of self-respect and confidence, after decades of a reflexive inferiority complex; and anyone daring to question either our underpinnings or our prospects faced condemnation – as if offending against religious orthodoxy. The banks, the Central Bank and the Financial Regulator all claim that the banks’ lending practices were stress-tested against the norms of the time; however, the prevailing euphoria may have served to relax even the norms. In the early stage of Ireland’s boom – up to 2003 – the demand for credit had been underpinned by economic fundamentals; but subsequently the demand was driven by its own momentum and by the availability of credit.
It was not as if the Central Bank had failed to issue warning after warning. “There is already a limit to the extent that borrowers can sustain rates of credit growth that are substantially above nominal income increases”, intoned the 2003 Annual Report. And the global banking crisis was ascribed, in the Bank’s 2007 Annual Report, to “an undue focus on prospective investment return without adequate attention to risk”. Indeed, the inflation ‘creep’ in lending terms (both in relation to loan-to-earnings and loan-to-value ratios) – culminating in the proverbial 100% mortgage – was already in the public domain. However, it is one thing to warn of impending disaster; it is quite another to take averting action.
To contribute to the maintenance of a stable financial system (in collaboration with the Financial Regulator) is one of the statutory functions of the Central Bank. In such an independent institution, those at the helm are paid to make big strategic calls and to get them right – even at the expense of appearing to ‘rain on other people’s parade’. In actual fact, by contrast, there is no question but that the Central bank – no less than the Government and the leaders of the commercial banks – presided over failure. The country should not now be forced – by keeping such people in position – to protect their reputations in spite of massive mistakes.
Daire O’Criodain is a former diplomat and aircraft financier, living in Clare. He is director of a number of private companies, a local commentator and an activist in the voluntary sector.
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