A former advisor to Brian Lenihan says he warned the Central Bank of a potential property crash as early as 2006, and that banks may have known that property developers were in trouble, years before the bank guarantee was introduced.
NUIG Professor Alan Ahearne told the Banking Inquiry he warned the Central Bank of the danger of a crash but the bank did not appear to act on it - and he was not asked to bring his reservations to government.
Professor Ahearne has been telling the Banking Inquiry that there are virtually no examples of a property boom ending in a 'soft landing'.
He says the Central Bank did show a limited amount of interest in his predictions.
“There was some feedback ... in the sense that there would have been some questions about the study we had done. I was not invited to present to (the) department of finance.”
He told the Banking Inquiry he knows of anecdotal claims where banks were giving developers new loans, simply to repay older loans that they couldn't afford.
“Rather than a developer actually formally defaulting they were making a new loan to the developer, the developer would use the money from the new loan to pay back the old one,” he said.
“That would make the developer therefore not be in default, so it would look on the banks books that the loans were fine but there’s a big problem because the developer isn’t selling the properties, and that’s the sort of rumour I picked up on.”
Mr Ahearne today told the Oireachtas Banking Inquiry that the tactic was a clear sign that banks knew they could be in trouble.
Aherane said the regulator did not lack the tools required to prevent the banks behaving in this manner, but they placed “a lot of trust in the senior management on the bank.”
“I don’t think the regulator lacked the tools – they were available,” Ahearne said.
“But they had a certain interpretation of principal based regulation which meant they really just looked at whether the banks had a certain governance systems in place. Have you an audit committee, that sort of stuff.
“They put a lot of trust in the senior management of the bank.”
