Norris raises red flag at IFSC

16 May 2010

By Kathleen Barrington

There has been surprisingly little media attention given to a ‘‘grossly serious matter’’ raised by Senator David Norris relating to liquidity breaches at the Irish operations of a leading European bank. It is believed that the scale of the alleged 2007 breaches was so great that it left the bank several billion euro short for liquidity purposes.
Norris told the Seanad in March of this year that he had been approached by a senior risk manager based at one of the European banks in the International Financial Services Centre. The risk manager said his repeated 2007 warnings that liquidity had fallen disastrously short of the required levels went virtually unheeded by both the bank and the Financial Regulator.
Sources have told The Insider that the bank in question is one of the largest banking groups in central Europe. The balance sheet of the Irish operation was about €25 billion at the time the alleged breaches occurred.
The risk manager, who had previously worked with German banks in Ireland, joined his new employer in mid-May 2007, just before the Financial Regulator’s new liquidity regulations came into force on July 1.
Liquidity management is an essential requirement for banks so that they can meet their obligations in a timely fashion as they fall due, while continuing to fund their day-to-day operations. The relevant rule stated that the liquidity ratio below which the bank should not fall was 90 per cent of its liabilities.
Yet, from July 2007 until the whistleblower’s resignation in mid-September of the same year, several daily liquidity reports showed the bank to be well beneath the 90 per cent ratio.
The risk manager was particularly concerned because the rules stated that breaches were punishable by a fine or a jail sentence.
Despite the fact that the bank insisted these were merely technical breaches, the risk manager proceeded to report a breach to the Financial Regulator in late July or early August 2007, Norris told the Seanad.
The risk manager delivered a letter to the Financial Regulator by hand, stating that the bank’s liquidity ratio stood at only 70 per cent - representing 20 times the permitted level of deviation - and promised to remedy the situation immediately.
He received a receipt which, said Norris, was now in the possession of the bank.
The risk manager was so worried that he contacted a well known firm of financial software consultants in London, who told him their calculations showed that the bank’s liquidity ratio was only 50 per cent - or 40 times the permitted level of deviation.
The whistleblower intensified his attempts to resolve the situation, but eventually resigned in order not to incriminate himself.
Norris said that the bank had claimed that his allegations were false and defamatory, and that it had threatened legal action.
But Norris told the Seanad he had formed the view that the whistleblower was a man of ‘‘integrity and courage’’.
Informants within the bank told the whistleblower that, on receipt of his resignation, all hell broke loose, and eventually the Financial Regulator took over the entire bank for approximately two weeks.
The link between the consultancy and the Dublin bank was disconnected on the Dublin side, and all communications between the bank and external consultants ceased.
‘‘This suggests panic on the part of the Financial Regulator and the bank. This was not entirely surprising given that the Financial Regulator was already under negative pressure from its German regulatory counterpart, BaFin, because of the near-collapse of Sachsen Landes Bank, triggered by irregularities in its Dublin subsidiary," said Norris.
The allegations made by Norris in March have, until now, been reported only in the Irish Times and in the influential German newspaper Suddeutsche Zeitung.
The allegations are of interest to German taxpayers, given that they are picking up the €100 billion tab for the collapse of Hypo Real Estate, following its purchase of Depfa, a German bank which was headquartered in the IFSC.
The Germans have pinned much of the blame for the bailout costs on the Irish regulator, citing its light-touch regulation of Depfa. Irish banking sources, however, point out that Hypo’s due diligence of Depfa should have picked up any problems, and they also suggest that the Germans are trying to wash their hands of a problem partly of their own making.
At any rate, the Irish taxpayer had a very lucky escape when it came to Depfa, as the cost of bailing it out would have come on top of the €73 billion that we are paying to bail out our own inadequately supervised banks and would probably have totally bankrupted the country.
The Insider understands that the allegations made by the whistleblower did not relate to Depfa.
But they are nevertheless of interest to the German taxpayer, as the bank against which the whistleblower made the allegations also operates in Germany.
The German newspaper described as ‘‘remarkable’’ the issuance by the Financial Regulator of a June 2009 document describing the liquidity regulations as ‘‘new", even though they were first issued in 2006 and had been in force since July 2007.
Norris has questioned why the bank appears not to have been punished, while the whistleblower remains unemployed - his reward for taking his responsibilities seriously. There is also the question of whether the Financial Regulator notified the parent bank and the regulator in the parent country.
A spokesman for the Financial Regulator said: ‘‘We are aware of the comments by Senator Norris.
Our records do not correspond with the characterisation of events by Senator Norris, nor did we receive what might be described as a ‘whistleblower’ letter."
‘‘We can, however, confirm that an overnight liquidity breach was reported by an institution around the time in question. The matter was followed up with the institution and rectified to the satisfaction of the Financial Regulator at the time."
The latter part of the statement is significant because it represents the first official confirmation that a liquidity breach was reported in the second half of 2007 - apparently corroborating for the first time at least one part of the whistleblower’s story.
The Financial Regulator declined to say whether it informed the parent bank and the relevant regulatory authority in the parent country.
In another strange twist to the story, the central European bank at whose IFSC subsidiary the whistleblower worked during the relevant period has emphatically denied that it is the bank to which Norris was referring in the Seanad.
The 2007 annual report of the bank’s Irish subsidiary states that ‘‘the beginning of 2008 has seen a continuation of the difficult situation in the credit market with liquidity at a premium’’, Elsewhere, the report states that, ‘‘in the light of pressures in the marketplace, we have maintained strong liquidity ratios since the middle of 2007’’.
Back in March, Norris said:‘‘This is a grossly serious matter which has been reported to the Financial Regulator.
‘‘A man has lost his job as a result.He honourably resigned. The degree of breach was 40 times the accepted margin. This is a disaster.
‘‘If we are not prepared to face the issue and investigate it when it has been laid before the House, there is absolutely no hope for the financial system or its reputation worldwide."