Lower credit standards, the introduction of high-risk products and access to credit on international money markets contributed to the Irish banking crisis, a new report found today.
The Nyberg report says while international developments helped trigger the crisis in Ireland, they did not cause it, and its origins were the result of "domestic Irish decisions and actions, some of which were made more profitable or possible by international developments".
It also concluded many Irish banks were increasingly led and managed by people with less practical experience of credit and risk management, while governance at some banks fell short of best practice.
The report also pointed to the introduction of potentially high-risk retail products, such as tracker mortgages and 100 per cent mortgages for first-time buyers, as contributors to the crisis.
"The willingness of banks to accept higher risks by providing more and shockingly larger loans primarily for commercial property deals was an important reason for the gradual increase in financial fragility in Ireland,” it said.
This willingness occurred following the emergence of strong foreign and domestic competitors within both the residential and commercial property lending markets.
The report pointed to the growth of Anglo Irish Bank and Irish Nationwide Building Society as a result of "relationship banking" as being important in terms of the resulting crisis.
"Anglo, and to a much lesser extent INBS, are important for the wider crisis because they were both seen as highly-profitable institutions to which other Irish banks should aspire," it found.
"As other banks tried to match the profitability of Anglo in particular, their behaviour gradually, and even at times unintentionally, became similar. Accordingly, when the crisis broke, large losses were realised not only in Anglo and INBS but in other banks as well."
The report said neither borrowers nor the banks understood the risks they were taking, causing loans to expand rapidly.
At Anglo and INBS in particular, traditional risk evaluation procedures and risk mitigation measures were not implemented in practice, while the banks became dependent on wholesale funding as assets grew rapidly but customer deposits failed to expand enough.
"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," it said.
Bank management may not have been aware of early warning signs, while the report also found indications that prudential concerns voiced in certain banks "may have been discouraged".
"If so, the pressure for conformity in the banks has proven to be quite expensive," it said.
