I am most grateful to you for raising this issue in the Dáil (Parliament) on Thursday last week (Nov. 25th 2010).
I welcomed your assistant’s invite to comment on the reply you received from the Minister of Finance, Mr. Brian Lenihan.
In view of the turbulent events of the last ten days, I firmly believe that now, more than ever before, it is in the public’s interest to be made aware of this affair. I have therefore decided to reply to your assistant’s request in this open and public platform of the internet.
For the benefit of the readers, I have begun by quoting your question in the Dáil and the minister’s reply to it. Following that, I have parsed the minister’s reply (black font) and inserted my comments (blue font).
I trust that my comments will assist you in your quest to reveal the facts of the matter. It is in all our interests that the whole truth of this affair should come to light as soon as possible.
Should I be of any further assistance to you, please contact me so that we can arrange to meet again.
Yours sincerely,
Whistleblower.Irl@gmail.com
-------------------------------------------------------------------------------------------
DÁIL QUESTION [http://debates.oireachtas.ie/dail/2010/11/25/00090.asp]
NO 86
To ask the Minister for Finance if his attention has been drawn to reports (details supplied) of major breaches of financial regulations in respect of liquidity requirements by a significant financial institution in the International Financial Services Centre; the actions he has taken on foot of these reports; if he has discussed these reports with the Financial Regulator, the Central Bank Governor, the Office of the Director of Corporate Enforcement or any other relevant authority; if a full investigation has been carried out, or is ongoing, to ascertain the veracity of these reports; if he envisages the introduction of new legislation, regulations or enforcement measures to ensure that breaches of this nature do not take place in the future; and if he will make a statement on the matter.
- Joan Burton.
Fintan O'Toole, Irish Times, 3rd April 2010;
Martin Hesse, Süddeutsche Zeitung, 23rd April 2010;
Kathleen Barrington, Sunday Business Post, 16th May 2010;
REPLY
Minister for Finance ( Mr Lenihan) : The Deputy may wish to note that the supervision and oversight of liquidity requirements for credit institutions is a regulatory matter for the Central Bank of Ireland. The Central Bank of Ireland is subject to strict confidentiality requirements under the EU Supervisory Directives and consequently does not share information on specific regulatory issues with my Department unless the issue gives rise, for example, to some broader financial stability issue in respect of which the Minister should be informed.
These circumstances did not arise in this instance. However, in response to the Deputy’s question my Department has been informed by the Central Bank of Ireland that an overnight liquidity breach was reported by an institution at the time referred to in the reports enclosed with the Deputy’s question. The Central Bank followed up on this liquidity breach with the institution, which rectified the position to the satisfaction of the Central Bank at the time. The Central Bank also required an external review of liquidity reports submitted to it and the related control environment. This review did not identify material issues relating to breaches of the required liquidity ratios, other than on the date highlighted by the institution.
The Central Bank imposes liquidity risk management requirements on all credit institutions. These are set out in ‘Requirements for the Management of Liquidity Risk,’ which are available to download from www.financialregulator.ie. Compliance with these requirements is monitored by a combination of on-site and off-site review and inspections. All credit institutions are required to complete an annual internal audit review and submit this report to the Central Bank on compliance with the Requirements. In addition, Section 47 of the Central Bank Act, 1989, provides that where a credit institution's external auditor has reason to believe there are material defects in the financial systems and controls or accounting records of an institution or has reason to believe that there are material inaccuracies in or omissions from any returns of a financial nature submitted to the Central Bank, they are required to notify the Central Bank without delay.
The Central Bank of Ireland has confirmed that this matter has now been fully investigated and the Central Bank is satisfied that all liquidity risk management requirements have been complied with and appropriate steps necessary to prevent any recurrence of this issue have now been taken by the institution concerned.
MY COMMENTS TO MINISTER LENIHAN’S REPLY
Minister for Finance ( Mr Lenihan) : The Deputy may wish to note that the supervision and oversight of liquidity requirements for credit institutions is a regulatory matter for the Central Bank of Ireland. The Central Bank of Ireland is subject to strict confidentiality requirements under the EU Supervisory Directives and consequently does not share information on specific regulatory issues with my Department unless the issue gives rise, for example, to some broader financial stability issue in respect of which the Minister should be informed.
Firstly, the Minister is correct in citing confidentiality requirements imposed on the actions taken by the Central Bank of Ireland. However, confidentiality does not apply to the manner in which the Central Bank fulfils its purpose under Irish law. The prompt departure of Governor Neary from office is an example of that.
Secondly, according to the Regulator’s own regulation, a materiality of a breach is defined as:
“4.3 Materiality -
Credit institutions may apply a materiality test to cash flows. The Financial Regulator proposes to adopt a materiality benchmark of 1 per cent of the gap ratio in each timeband.”
The breach reported to the Regulator exceeded the Regulator’s own benchmark by 1900% (one thousand and nine hundred percent), and amounted to billions of Euro. Given the State’s recent requests for ECB & IMF funding on account of liquidity deficiencies throughout the entire Irish banking system, can the Minister confirm that his office was notified of this breach at the time that it occurred? Can the Minister please advise the House what scale of breach would he deem to be of significance to ‘broader financial stability’?
These circumstances did not arise in this instance.
Is the Minister satisfied that breaches of this magnitude, which amounted to billions of Euro in this case, should not have been brought to the immediate attention of the Minister? On what basis was the regulator able to ascertain that “These circumstances did not arise in this instance.”?
In his response to Senator’s Norris address to the Seanad on 23 Feb. this year, Minister Lenihan stated that “The Financial Regulator maintains close communication with the regulators of other member states for this purpose.” Given this statement and the incomprehensible magnitude of the breach which was reported to the Regulator “in late July or early August 2007” according to Senator Norris’ statement, can the Minister confirm that the relevant European regulator was indeed notified of the liquidity breach at the offending bank? No doubt, it would have been in the interest of all parties concerned to ensure that both the parent company and its corresponding regulator would have been informed of this breach.
If the relevant European regulator was notified of this breach, what was his response? Is there any legal impediment for the Minister to inform the House what were the consequences of the communication with the relevant Regulator?
On the other hand, if, in contrast to the Minister’s statement above, the relevant European regulator was not notified about this major breach at the bank in question, can the Minister explain the reason for breaking with his stated policy?
However, in response to the Deputy’s question my Department has been informed by the Central Bank of Ireland that an overnight liquidity breach was reported by an institution at the time referred to in the reports enclosed with the Deputy’s question. The Central Bank followed up on this liquidity breach with the institution, which rectified the position to the satisfaction of the Central Bank at the time.
Whistleblower, whose position as the offending bank’s Risk Manager had been ratified by the bank’s board of Directors, attended the office for at least six weeks after he notified the Regulator of said breach. Apart for the acknowledgement of the letter he handed to Regulator’s office informing him of the breach, no further communication was received from the Regulator’s office during this six weeks period. Can the Central Bank advise in what way he had ‘followed up on this liquidity breach’?
An elementary aspect of financial risk management is the practice of daily liquidity forecasting. According to the Regulator’s own directive “it is essential that both the qualitative and quantitative liquidity requirements are met on an on-going basis.”(Section 1.4). Does the Minister not find it puzzling that a breach of such magnitude could occur over-night. In what way was The Regulator able to ascertain that this breach was not the culmination of an un-monitored or un-reported deteriorating liquidity situation? How was the Regulator able to confirm that the offending bank was immediately able to rectify the situation?
The Regulator’s liquidity management requirements also stipulate that “Each credit institution must have a management information system that is adequate to measure, monitor, control and report liquidity risk considering the nature, size and complexity of the credit institution.” (Section 3.4) How was the Central Bank able to ‘satisfy’ itself that the flagrant breach of which it was notified was not an indication of a continuous malfunctioning of the bank’s Management Information Systems (MIS)?
Can the Minister shed some light on the involvement of the London-based IT consultancy which was brought into the bank to review its MIS according to Senator Norris? As there is written proof of this company’s alarming opinion of this MIS system, and given that this company was, and has been, put in charge of similar systems in Irish banks that have since then been guaranteed/nationalised by the state, is the Minister of the opinion that this IT company simply ‘got it wrong’ in the case of the bank at which Whistleblower worked?
The Central Bank also required an external review of liquidity reports submitted to it and the related control environment. This review did not identify material issues relating to breaches of the required liquidity ratios, other than on the date highlighted by the institution.
Can the Minister please inform the House who carried out the external review? What were the findings of the external review? As Senator Norris stated, the significant liquidity breaches continued on a regular basis after the 20% breach had been reported to the Regulator. Senator Norris also mentioned having met a senior banking executive who attested to Whistleblower’s account of events. Therefore, how does the Minister explain the absence of any further findings by this ‘external review’?
The Central Bank imposes liquidity risk management requirements on all credit institutions. These are set out in ‘Requirements for the Management of Liquidity Risk,’ which are available to download from www.financialregulator.ie.
We have indeed downloaded the relevant documents from the Regulators website.
Requirements for the Management of Liquidity Risk, June 2006:
Can the Minister please explain why the liquidity requirements document issued in June 2009 refers to the already-existing liquidity regulations as “new” in section 1.3, despite the fact that they had already been published in 2006? How does the Minister explain the fact that the legal basis (section 1) in the 2009 makes reference to Central Bank Acts dating as far back as 1942, but yet nowhere in this entire document is there a reference to the 2006 document? How does the Minister explain the disappearance of Section 9.4 – Implementation from the 2009 document? Did the Financial Regulator retract the 2006 requirements? If so, when did he do so?
Both documents include Section 10 – Penalties. This section states that:
...In particular, section 58 of the Central Bank Act of 1971, which refers to Offences and punishments, as amended by the substitution of section 9 of the Central Bank Act, 1989, states that a holder of a licence who commits by act or omission a breach of a condition duly imposed and which relates to a licence shall be guilty of an offence and shall be liable-
(i) “on summary conviction, to a fine not exceeding £1,000 or, at the discretion of the court, to imprisonment for a term not exceeding 12 months, or to both, or
(ii) on conviction on indictment, to a fine not exceeding £50,000 or, at the discretion of the court, to imprisonment for a term not exceeding 5 years, or to both,
....Section 60 of the 1971 Act contains an extension of the offending provisions. This states: “Where an offence under this Act is committed by a body corporate or by a person purporting to act on behalf of a body corporate or an unincorporated body of persons and is proved to have been so committed with the consent or approval of, or to have been facilitated by any wilful neglect on the part of, any director, manager, secretary, member of any committee of management or other controlling authority of such body or official of such body, such person shall also be guilty of the offence.”
In Minister Lenihan’s response to Senator Norris which was read out by Deputy Brady on 23 February 2010, Minister Lenihan stated that “Breaches of liquidity requirements may be subject to proceedings under the Financial Regulator’s administrative sanctions procedure or to prosecution.”
In view of Minister’s statement in the Seanad and the regulations and banking acts cited by the Regulator, can the Minister explain how and why was it determined that no administrative sanction procedures or prosecutions were to be initiated in the case of the bank where Whistleblower had worked?
In view of the well documented collapse of Hypo Real Estate in Germany due to the failing of Depfa – its Irish subsidiary, and the repeated cash injections of Irish tax payers’ money by the Minister’s government into Irish banks on account of their failure to meet liquidity requirements, can the Minister inform the House how many cases of administrative sanctions and/or prosecutions have been initiated against banks and their executives in Ireland?
Can the Minister inform the House how many incidents of liquidity breaches have been recorded by the Regulator which have not resulted in sanctions? (A law unenforced is a law ignored.) Can Minister state how many institutions breached liquidity requirements since he came to office? what was the average percentage of the deviation of these breaches from the minimum threshold required by the Regulator? What was the average amount of these breaches? Can the Minister describe what factors have influenced the Regulator’s decision not to prosecute?
Compliance with these requirements is monitored by a combination of on-site and off-site review and inspections.
As the Minister has made inquiries with the Central Bank after receiving this question last week, he would no doubt be able to inform the House when the on-site and off-site reviews and inspections were done in 2007 at the bank in which Whistleblower worked. Can the Minister please inform the House of the dates of these inspections and their subsequent findings?
All credit institutions are required to complete an annual internal audit review and submit this report to the Central Bank on compliance with the Requirements. In addition, Section 47 of the Central Bank Act, 1989, provides that where a credit institution's external auditor has reason to believe there are material defects in the financial systems and controls or accounting records of an institution or has reason to believe that there are material inaccuracies in or omissions from any returns of a financial nature submitted to the Central Bank, they are required to notify the Central Bank without delay.
Can the Minister inform the House if/when did external auditors act in accordance with Section 47 of the Central Bank Act, 1989 in relation to any of the Irish banks that were covered by the state guarantee which was introduced in September 2008?
In relation to the bank at which Whistleblower worked, how was the Central Bank able to confirm that both the bank’s internal auditors, and its external auditors, have been conforming to the Central Bank Acts cited above?
The Central Bank of Ireland has confirmed that this matter has now been fully investigated and the Central Bank is satisfied that all liquidity risk management requirements have been complied with and appropriate steps necessary to prevent any recurrence of this issue have now been taken by the institution concerned.
Given the above statement that ‘this matter has now been fully investigated and the Central Bank is satisfied etc’, can the Minister explain why the specific and severe allegations raised by Senator Norris nine months ago have not been addressed by the Minister at the Dail (parliament), or the Seanad (Senate) since then? At a time when Ireland has been battling to defend its beleaguered reputation in the financial markets the world-over, this silence has ill-served the nation’s best interests.
It is somewhat puzzling that the Minister was able set aside time in his extremely busy schedule to write an article for the English Financial Times last Thursday, an article in which he acknowledged the damage done to Ireland’s reputation under this government, but yet at no point in time over the last nine months did he trouble himself to ‘set the record straight’ regarding this 1,900% breach of banking law which was recorded on the pages of the Irish Senate .
