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MICHAEL FINGLETON’S DEATH this week does not necessarily end his role in the 2008 banking crisis that pushed Ireland into a humiliating EU/IMF bailout in 2010.

Last October, a very long-running civil action taken by the liquidators of Irish Bank Resolution Corporation (IBRC) concluded in the High Court. It remains to be seen whether Mr Justice Michael Quinn will deliver his verdict following Fingleton’s death. At stake is an attempt by the liquidators to recoup €250 million from the former chief executive of Irish Nationwide Building Society (INBS) for alleged negligent management of the bank in the years prior to its collapse.

In the end, the fall was precipitous for Fingleton, and a world far removed from the height of the Celtic Tiger. In 2007, Fingleton put INBS up for sale with a price tag of €1.5 billion, which would have made him a very rich man if it had been sold. There is no doubt that based on the raw numbers, INBS was an attractive proposition for international investors looking for exposure to the fastest growing economy in the EU.

In 2007, INBS made a profit of €391 million and had a loan book of €16 billion. But Fingleton’s timing was off. INBS went up for sale just as the first cracks emerged in the US financial system that would presage the worst global financial crisis since 1929.

Ireland was affected more than almost every other country because the banking system was so dangerously leveraged. And INBS was the canary in the coal mine.

The real question was how could a building society grow from a loan book of €2.3 million in 1973 to €16 billion just over three decades later. After all, this eye-spinning expansion happened in the full glare of regulators, investors and politicians.

The answer is complex and was largely caused by developments elsewhere. Up to the 1990s, the financial systems in the US and the UK were tightly regulated. But during that decade a consensus emerged that banks were far too constrained and that a light touch regulatory environment would spur economic growth.

Where the US and UK went, other countries soon followed. European Monetary Union in the late 1990s was another important development as it enabled unfettered financial flows between EU member states.

Ireland embraced the new culture of light touch regulation with alacrity. It is hard for any young person now to imagine what it was like in the decade leading up to the 2008 crash, but banks were literally throwing money at mortgage applicants.

Bank of Scotland (Ireland) was the first to offer 100% mortgages, but the rest of the banks soon followed. Moreover, as there were roughly six domestic banks and a further six foreign owned banks operating in Ireland, the competition to profit from the property frenzy was intense. It was not uncommon for mortgages to be offered for up to 10 times the applicant’s annual salary and for income levels to be artificially inflated.

Banks also became very willing lenders to property developers.

In 2007, Ireland had the healthiest national finances in the EU based on taxes generated by the property bubble. Rather than proceed with caution, the government used bulging tax receipts to ramp up spending. The Central Bank looked on approvingly.

However, in 2008 it came to a shuddering halt. International money markets became paralysed as investors eyed each other with suspicion over the amount of toxic assets they were holding on their balance sheets. Irish banks had become heavily reliant on short term money markets to fund their day-to-day operations.

The Irish government had to provide a blanket guarantee of the banking system in September 2008 to stave off a sector wide collapse. That decision combined with the collapse in government revenues, forced the state into an EU/IMF bailout in November 2010.

It soon emerged that what little regulation existed in the years leading up to the crash had not been enforced.

A case in point was Fingleton. He had been chief executive of INBS for 38 years by the time he was forced to retire in 2009.

A subsequent investigation found that he had run the bank without adequate controls in place. He had personally authorised loans without doing proper due diligence, and he had taken personal equity stakes in developments where INBS was the main source of funding.

He took a €1 million bonus in 2009 even though it was evident at that stage that INBS was insolvent. He said he would return the payment, but never did. The scale of Fingleton’s reckless lending spree was underlined by INBS’s eventual losses of €5.4 billion that had to be covered by the taxpayer.

But Fingleton was far from the only offender. Anglo Irish Bank was equally as reckless in its lending standards as INBS. The two of them were folded into Irish Bank Resolution Corporation (IBRC) and racked up combined losses of €30 billion.

The late Sean Fitzpatrick, former Chief Executive of Anglo Irish Bank, at the bank’s AGM in the Shelbourne Hotel, 23 January, 2004.Source: Leon Farrell/RollingNews.ie

The government set up the National Asset Management Agency (Nama) in 2009 to manage the estimated €77 billion of troubled loans to property developers sitting on the balance sheets of the six domestic banks.

Coincidentally, Nama was officially wound down the week before Fingleton’s death.

But the impact of the banking crisis has had profound and lasting consequences.

There has been a complete overhaul of how banks are regulated. European Banking Union was established in 2014 with the creation of the Single Supervisory Mechanism (SSM) based in Frankfurt. The rationale for this move is that national regulation is ineffective in a monetary union.

The Central Bank of Ireland still exists, but it has limited functions and is mainly responsible for enforcing regulations stipulated by the SSM.

There is no doubt that the regulatory regime is much more comprehensive than the years preceding the crash. The banks are required to hold much higher levels of capital to act as buffers against future losses. These capital ratios are based on historical losses, which means that Irish banks are required to hold much higher levels of capital than their EU counterparts.

In practical terms, this means there are strict limits on how much Irish mortgage applicants can borrow in terms of loan-to-value and relative to their income. Moreover, Irish banks are effectively prohibited from lending to property developers, which has significant consequences. One of the main reasons why there is such a shortage of housing is that property developers cannot access the funding needed to build houses on the scale needed.

There is an argument that whereas Ireland may have been far too loosely regulated prior to the crash, it is now too tightly regulated. One area in particular that has come under the spotlight is executive accountability. Bank executives in Ireland have a higher degree of oversight than their EU counterparts, and there is a view that this is one of the main reasons why foreign banks remain unwilling to set up in Ireland.

In 2007, there were over 12 banks operating in the Irish market. Today there are three domestic banks. And even though Ireland remains one of the fastest growing economies in the EU, apart from BAWAG’s recent takeover of PTSB, there has been little interest from bigger EU financial firms. The paucity of competition puts Irish consumers at a disadvantage.

It is extremely difficult to imagine a banking collapse on the scale of what happened in Ireland less than 20 years ago based on the current regulatory framework. But the financial sector has a lot of money and powerful lobbyists. The Trump administration is already rowing back on regulations introduced in the US in the wake of the 2008 crisis.

There is no sign of that happening in the EU yet. And that is why the tale of Fingleton and INBS should act as a salutary tale for years to come.

John Walsh is a former business journalist who covered the banking crisis.

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