On the 30th April, I asked Governor of the Central Bank, Professor Patrick Honohan, his opinion on the recent Anglo Judgement.
I asked him whether he believes it’s acceptable that some of the banks are publicly stating they will go against the spirit of the new insolvency legislation. We now have a judgement saying that the Central Bank led two people to break the law- I asked him if he felt it was time to call the Gardaí and have a criminal investigation.
We chatted about the legal issues surrounding the Central Bank, and what they mean to people in debt. You can see the full conversation below.
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Deputy Stephen S. Donnelly: I thank the Governor for his time today. I begin by referring to the judgment yesterday in the Anglo Irish Bank case. I understand there are constraints in what we can say, but not in respect of the particular point I wish to make. Judge Nolan said in court yesterday, “It would be most unjust to jail these two men when I feel that a State agency had led the two men into error and illegality.” The most important words here are “led the two men into error and illegality”. This is a very serious finding and I am sure the Governor is examining it with great interest. Now that we have a judgment saying that the Central Bank led two people to break the law, is it not time to call in An Garda Síochána and have a criminal investigation?
Professor Patrick Honohan: All I will say is that the Central Bank commenced an investigation into these matters – in 2009, before my time – including the matter that was dealt with in court yesterday. Arising out of that investigation, the Central Bank passed all of the information available to it to the Garda on the suspicion that there had been some criminality. The matter is now entirely in the hands of the Garda. No additional data or searching are required from the Central Bank’s side. We have handed the matter over entirely to the Garda.
Deputy Stephen S. Donnelly: On the basis that the judge in this case has publicly stated that the Central Bank led people to break the law, does Professor Honohan expect the Garda to look at prosecuting the bank?
Vice Chairman: The Governor might have difficulty answering questions on behalf of the Garda or the DPP.
Professor Patrick Honohan: The question the Deputy is raising is entirely a matter for other agencies.
Deputy Stephen S. Donnelly: I thank the Governor. Before making my next point, I emphasise that I have the height of respect both for the position the Governor holds and for him as an individual holding that position. However, in light of the testimony we have heard from the banks and from organisations which are trying to help borrowers in distress, and from everything I have seen come through my own door and through various discussions we have had, I was very disappointed with Professor Honohan’s opening statement. Were I a banker, on the other hand, I would be reasonably happy with it. The message is that things are more or less going according to plan, that the Central Bank has identified four areas in which change is required and is working with the banks to ensure it happens. That certainly does not represent any type of call to arms.
It does not indicate that any alarms went off in the Central Bank to warn that something was going quite seriously wrong and that the approach needed to be changed. If I were some of the banks who came before the committee two weeks ago, I would be pretty happy. My interpretation would be that the Central Bank is more or less okay with the way the banks are proceeding to deal with this matter. If I were a borrower whose mortgage is in distress or an individual who was trying to assist such borrowers – not to mention the fact that I am a Deputy – I would be extremely disappointed with what I have heard today.
I am of the view that the Central Bank is taking a hands-off approach to this matter. Let me explain why I believe this to be the case. We know the banks are allowed to define what constitutes a sustainable offer and that they do so within parameters set by the Central Bank. However, the banks have quite a broad remit in the context of what they view to be sustainable. The banks now have more or less unlimited contact with their customers as a result of the changes to the code of conduct on mortgage arrears. We are aware that not only can the banks veto any insolvency proposal, but two of them have stated that they will – as a matter of policy – veto any such proposal which includes a write-down of secured debt. We know that the banks are allowed to categorise customers – Irish citizens – as being uncooperative. This is not Professor Honohan’s fault; it is as a result of the changes introduced in the legislation. It is outrageous that Irish banks are allowed to deny Irish citizens access to the legislative process of insolvency by stating that they believe them to be not co-operating. If a borrower wants to make an appeal against the actions of a bank, it must go to the bank itself.
I believe everything I have just said to be true. We are also aware that there is absolutely no consistency. Representatives from the four main lenders came before the committee last week. A previous speaker already outlined the interactions that took place with Mr. Richie Boucher, and Bank of Ireland has stated that it will veto any PIA which includes a proposed write-down of unsecured debt. We know that Bank of Ireland’s split-mortgage concept is a farce. This is because it charges the same interest on the shelved portion as it does in respect of the non-shelved portion. The figures presented by all of the banks show that Bank of Ireland’s rate of legal proceedings initiated is two to four times higher than the other three institutions. We all know that the difference between financial recovery and financial ruin for those in Ireland who are dealing with unsustainable debt largely comes down to the bank one is dealing with. A person can be really unlucky and have his or her loan sold to LoanStar, Oaktree Capital or any of the other unregulated entities. He or she can also be unlucky in that he or she might be obliged to deal with Bank of Ireland as opposed to one of the other three banks, from which he or she might obtain a deal. We are aware that there is very little quality on offer and that thousands of legal letters have been sent out. The vast majority of the so-called sustainable proposals take the form of either legal letters or extend-and-pretend measures such as interest-only arrangements, recapitalisation of arrears and so forth. I do not believe that the approach to take in dealing with an unsustainable debt crisis is to increase the total payments due during the course of the type of arrangements to which I refer. Essentially, the latter is actually what is happening.
I hope Professor Honohan’s sense of urgency and that of the Central Bank are greater than what has been outlined here. Does Professor Honohan find it acceptable that there is so much inconsistency across the banks in the context of how they are dealing with people? Does he find it acceptable that several of them are publicly stating they are going to go against the spirit of the insolvency process? Does he find it acceptable that so few insolvency agreements have been concluded to date? Does he find it acceptable that the fast majority of so-called solutions involve either legal threats or an increase in the total amount that borrowers will be obliged to repay?
Professor Patrick Honohan: I can see how the wording of my statement may have informed what the Deputy just said. As I was reading it, I thought it was coming across as a bit more complacent than I would have intended. The Chairman referred to the fact that when I came before the committee just over a year ago, I had referred to tearing my hair out, etc. After the meeting in question we introduced this regime or process and I thought it would not be productive to make empty gestures of frustration, particularly when the process started to generate actual results. The glass is either half-full or half-empty, or an eighth full and seven eighths empty in this regard. Deals are being done, split mortgages – some more effective than others – are on offer and there are numbers in four figures in respect of term extensions and arrears capitalisation. The Central Bank has engaged outsiders and is using its own staff to try to probe the latter to see whether they are really viable. We have rejected some, but viable arrangements are being reached. I accept, however, that they are not all perfect. I am sure the quality of both the engagement and the communication, which is so crucial for the well-being of the borrower, is very mixed and uneven. I am of the view, however, that the process is gaining traction. The more cases that are dealt with, the more people will learn from them and converge on the most effective types of arrangement.
It will be a long haul. After what Deputy McDonald said, I am afraid to use particular words. If I use the word “unpleasant”, people will be of the view that I am being condescending or something of that nature. I accept that it is an extremely difficult process for borrowers and it is not being handled well. However, it is being handled, and something is happening. I have doubt that the Deputy and his colleagues are being approached by constituents – particularly those whose arrangements are not working – who want to relay what has happened to them. I am sure there are numerous cases in which the arrangements reached are not working. We reviewed a small sample and we found some that were not working.
Deputy Stephen S. Donnelly: There is anecdotal evidence, but let us focus on the lack of consistency. We are all aware of anecdotes and we must be extremely careful with regard to surmising conclusions from them. However, there are far more than anecdotes available. The banks came before the committee and we know that there is inconsistency because it is their stated policy. Is it acceptable to Professor Honohan, as Governor of the Central Bank, that Bank of Ireland, for example, does not offer a 0% rate on the warehoused portion of split mortgages when all of the other institutions do offer such a rate? If it is not acceptable, why does he not insist that Bank of Ireland do what the other banks are doing?
Professor Patrick Honohan: We could change this and develop it, but the approach that the Central Bank and I are advocating is that a standard should be created and that this should then be allowed to be met. If that appears to create differences, so be it. I do not find it objectionable that there are differences, as long as an acceptable and sustainable standard is achieved in respect of restructuring. If we manage to arrive at a sustainable solution that really works, then the fact that there are some differences between one person and another would constitute much less of a problem.
Deputy Stephen S. Donnelly: Why? There is an obvious problem here in that there is a substantive unfairness in how people are being dealt with by the different banks. The Central Bank can solve this. It has power under the Acts we passed last year to insist on consistency of solutions. Why is it not insisting on consistency? What is the downside to consistency?
Professor Patrick Honohan: I am not sure I want to develop the point in this regard, but my perspective on this matter is that if we imposed a particular solution – which would involve a one-size-fits-all approach – down the track the banks could push back and there could be a constitutional challenge.
Deputy Stephen S. Donnelly: I am not suggesting that there should be one solution for everybody. I understand that a certain amount of variance is required, but what is the downside to informing Bank of Ireland that, just like everybody else, it must charge 0% on the shelved portion of split mortgage debt?
Professor Patrick Honohan: Let us consider the case of someone who could very nearly pay his or her entire debt. Why should Bank of Ireland be placed in a position by the Central Bank of Ireland whereby it cannot collect on the debt?
It may decide the person can afford to pay the debt if it makes what might be called a baby split mortgage arrangement but now it is being told by the Central Bank that it has to give away a lot of value. It is moving away from regulation into property rights. However, I am not precluding that we could move tighter in that direction but there has been a merit of allowing a variety of standards to meet different cases and exploit different ideas in various parts of the banking system.
Deputy Stephen S. Donnelly: I agree that a suite of solutions is needed but the unfairness and the inconsistency—–
Professor Patrick Honohan: What the Deputy is saying is that he does not believe some of the solutions are sustainable. It has to be flushed out that they do not satisfy the standards we have set, which I believe are high standards.
Deputy Stephen S. Donnelly: That is well in theory but that is not what is happening on the ground. What is happening on the ground is that the banks are coming in with their financial, legal and procedural expertise and they are more or less bullying these borrowers into solutions, although not in every case and not in every bank. I believe a level of leniency is being allowed by the Central Bank which has resulted in at least one chief executive coming in here with an attitude that the bank can do pretty much what it wants, that it can squeeze people, and the more it squeezes people the more its share price goes up, which it believe is a good outcome. Professor Honohan appears to be comfortable allowing that to happen.
Professor Patrick Honohan: I am not sure that the behaviour is as different as the individual’s projection of themselves.
Deputy Stephen S. Donnelly: To give an example, in terms of legal proceedings Bank of Ireland is two to four times the rate of the others. That is the data.
Professor Patrick Honohan: It depends on the types of cases they are taking. There is no way this is working out perfectly. I am listening closely to the comments of the Deputies, as I listen to other comments, but I believe progress is being made. It is not going backwards. It is going forwards, and as the quality of the engagement and the selection of solutions improves, I believe that progress can accelerate but I am not excluding a tightening or strengthening of our code and our definition of sustainability.
Deputy Stephen S. Donnelly: I thank Professor Honohan.
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