Irish Ready to Quiz Bankers Amid Concern That Bubble Back

By Joe Brennan  

Photographer: Aidan Crawley/Bloomberg

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Ireland’s banking inquiry could help avoid a repeat of western Europe’s worst real-estate crash as house prices surge again, according to the chairman of a parliamentary probe into the country’s financial meltdown.
Prime Minister Enda Kenny set up the 11-member inquiry to uncover the “full truth” about the banking crisis which drove the country into an international bailout in 2010. The group, which began private meetings in June, will start public hearings next year, with a final report due by November 2015.
“Two years ago, people may have questioned the relevance, saying a bubble like the one we’ve gone through would never happen again,” Ciaran Lynch, 50, a lawmaker with the Labour Party, junior partner in the ruling coalition, said in an interview. “Maybe they’re less sure now.”
House prices in Ireland are
rising at a faster pace than in the bubble years. During the boom, climbing prices sparked a surge in building and lending, which ended in a 64 billion-euro ($85.5 billion) state bailout of the financial system. Government policy, reckless lending and poor regulation lay behind the bubble, according to three earlier government-commissioned reports.
“The main difference is that this time round, the personalities, parties and agencies referred to in the previous reports will be giving their first-hand account of what happened in a public arena,” said Lynch. “For many, it will be their first public comments on what happened.”
The inquiry has yet to set out its terms of reference, which will help decide the scope of the investigation and the witnesses to be called.

Deep Dive

The probe’s success “will be determined by how deeply it dives into the banks,” said Stephen Kinsella, economics lecturer at the University of Limerick. “It really needs to get in senior middle management types who were actually making decisions as well as delving into the culture of credit committees.”
The inquiry is unfolding as prices rise again. Home prices across the country gained an annual 12.5 percent in June, driven by a 24 percent surge in Dublin values, according to the country’s statistics office. Values remain 43 percent below their 2007 peak and Irish mortgage lending is running at less than 10 percent of the 2006 record of 40 billion euros.

‘Credit Fueled’

“The type of bubble which is credit fueled and is horrifically damaging, as we’ve had in the past is obviously not what we’re talking about here,” Allied Irish Banks Plc (ALBK)’s Chief Financial Officer Mark Bourke said in a phone interview on July 30. “There are fairly severe bottlenecks in supply which have nothing to do with the banking industry.”
About 8,300 homes were constructed in 2013, according to state records. On average, about 30,000 houses a year have been built since the 1970s. At the peak of the market, developers were building about 93,000 homes a year.
Irish house prices are now undervalued, having “overcorrected” since 2007, and recent rises don’t constitute another bubble, Kieran McQuinn, an associate research professor with the Economic and Social Research Institute in Dublin, wrote in a report today. Still, bubbles can emerge if banks ease lending conditions after a “sustained” period of value increases, he said.
“This underscores the need to monitor consistently and analyze the level of credit in the housing market,” he said, adding that regulatory actions to control the market as credit becomes more freely available will be important.

Bankers Sentenced

Lynch said the inquiry won’t encroach on upcoming court trials stemming from the crisis, with any relevant material passed on to prosecutors. Two former Anglo Irish Bank Corp. executives last week received community services sentences for aiding an illegal loans-for-shares scheme in 2008.
Even before starting work, the inquiry has courted controversy. Independent lawmaker Stephen Donnelly quit the inquiry in June, saying the government engineered the process to make sure it had a majority on the committee.
Fianna Fail, which held power during the boom, has also raised concerns about politics interfering with the probe. The final report will be published months before a general election is due to be held.
Lynch said he can use his authority to remove members that venture beyond the inquiry’s remit.
“I’ve called on all committee members to leave their club jerseys on the door on the way in,” Lynch said.