Bank enquiry – where were the bank economists?

28 December, 2009

As is now well known, Patrick Honohan, the Governor of the Central Bank, has suggested that some form of enquiry into the banking crisis should take place.  On 15th December, he told the Joint Oireachtas Committee on Economic Regulatory Affairs:

“I expect that the Oireachtas will, in time, decide to authorise some form of inquiry to try to understand the deeper, underlying causes of this crisis so that wider lessons can be learnt for the future.”

I hope that such an enquiry (assuming Fianna Fáil can be persuaded to hold one) will include what, if anything, the in-house economists in the main banks were saying to their management, their risk allocators and their boards of directors during the critical years 2004 to 2006.    This was the period when venerable banking institutions (and I don’t include Anglo-Irish Bank in that description) went crazy and took unconscionable risks with property lending.  What happened to the balance sheets of the main banks in those three years is truly frightening, and our regulator bizarrely and disgracefully failed to act on it.  Honohan wrote an excellent paper on this earlier this year (see here and here).

The reputation of Irish economists as a whole has probably suffered as a result of their general failure (with a few exceptions) to stand up and be counted when it mattered.  It would be interesting to see if the relevant in-house economists were at least trying to influence management at Bank of Ireland and AIB in particular, or were they actually part of the problem.

Did the in-house economists realise the risks being taken? Did they warn about them?  If not, why not?  If they did, why were they ignored?  What is their role in guiding the bank in allocating capital risk among sectors?  What exactly is the job specification of a bank economist?  Not just churning out fliers for client consumption, surely?

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