Digging into the Honohan report

Aside from the clear issues surrounding the dumping of information by the HSE last Friday (we are working on that in the meantime) the banking reports are also clearly an important issue. We will try to cover both of these issues over the coming days.

I am initially particularly interested in one small part of the Honohan report:

While there was eventually a broad consensus, including among CBFSAI officials, that the guarantee scheme for all institutions was the best approach, the idea of nationalising Anglo Irish Bank (implying an associated change in management) as an accompanying measure was also on the table. As a contingency (and highly confidential) precautionary measure, legislation to nationalise a troubled bank and/or building society had been in preparation for some time.

It was felt by some that nationalising Anglo Irish Bank – which was facing by far the most serious liquidity crisis – would reduce the reputational damage that it was causing to the Irish banking system. This bank‘s business model was also thought by many to be irrecoverably broken; although few participants were even beginning to think it might have actual solvency issues.

Among the arguments against an overnight nationalisation was the fear that it could present undue operational risks and that it might have a destabilising effect on markets. In the event, by the end of the week, the inflow of liquidity took the matter off the agenda.

10 Other options mooted included extensive use of Emergency Lending Assistance (ELA) from the Central Bank and/or the creation and use of a domestic fund drawing in addition on resources from the NTMA. The possibility of temporary support from the two largest banks was also envisaged. None of these options could be expected to do more than buy a few days – say until the following weekend.

11 This planning was first inspired by the experience of the UK Government in relation to the failure of Northern Rock one year earlier.

Northern Rock was nationalised in September 2007, a full year before the bank guarantee. So is the entire narrative about an emergency guarantee now defunct? As Finance Minister, how much did Brian Cowen know about Anglo before the bank guarantee, and indeed before the St Patrick’s day massacre, before the CFD deal with Sean Quinn. How much did Bertie Ahern know? How much did the Cabinet know? How much did the Department of Finance know? How many investigations were carried out into the loan book of Anglo over the period September 2007 to September 2008? Why, exactly, did Mr Cowen repeatedly refer to Lehman as the the core cause, when in fact his Department and the Central Bank were surveying problems for 12 months, and why did they solely concentrate on liquidity issues, and not include issues of solvency?

Further down the report, Honohan is critical of the night of the guarantee itself:

A detailed review of the ensuing discussions is hampered by the absence of an extensive written record of what transpired. Although the minutes of meetings of the CBFSAI Board and the Authority during the period contain references to various options, there is an absence of documentation setting forth the advantages and disadvantages of possible alternatives and their quantitative implications. While CBFSAI Board members expressed some broad views on possible approaches, no decisions were taken, as the solutions would need to be found at Governmental level. The key discussions took place via the very many informal contacts and meetings between senior officials of the DSG agencies, the NTMA, and consultants; what follows relies to a very large extent on the personal recollections of participants.


There is no doubt that from mid 2007 onwards Ireland increasingly faced a potentially serious financial crisis. Although the deteriorating international environment was what finally set the flames alight elements had been building for some considerable time beforehand. The overly sanguine, even complacent, view presented in the 2007 FSR and the resulting ensuing conviction that whatever problems that might arise would only be one of a liquidity led to two missed opportunities; first, to convey a strong message to the banks that they needed to build up capital urgently to be able to handle contingencies, or even to require them to do so; and second, to undertake comprehensive preparatory work to analyse quantitatively policy options available in the event the unthinkable might transpire.