The Irish Independent reports that the new governor of the Central Bank has come out against capping the salaries of top-earning bank executives.
In an exclusive interview with the Irish Independent, Dr Patrick Honohan said banks risked losing out on the best candidates if they could not offer competitive pay packages.
"Around the world, people are becoming less keen on absolute ceilings on earnings. If you do that, you can end up losing the people you want to keep,"Dr Honohan said in his first major interview since his appointment.
The governor was speaking as Allied Irish Banks bowed to government pressure to cap its executives' salaries after an extraordinary stand-off between the bailed-out bank and Finance Minister Brian Lenihan.
Dr Honohan said attention would have to shift from salary caps to the bonuses paid to top executives to ensure they did not encourage risky behaviour.
He said he recognised public concern about high salaries, but added the important thing was to ensure that such payments did not encourage bankers to make risky loans.
"The focus in other countries is already on reducing the payment of short-term bonuses, before the consequences of executive decisions become clear. We have to try to align the incentives for chief executives of banks with the common good of the community," he said.
"The minister has discretion on the payment ceiling. I don't think he will adopt a dog-in-the-manger attitude."
At present no bonuses can be paid to executives of state-guaranteed banks, although some have been deferred. Bonus payments are expected to return eventually, but in line with revised international guidelines.
The governor also promised to get tough on errant bankers.
"We must enforce both the rules that are there, and the principles which have been laid down. I am prepared to take court action, especially if some past behaviours re-appear,"Dr Honohan said.
Pressure
AIB yesterday bowed to intense public pressure to shave €130,000 off what it planned to pay its new managing director Colm Doherty to bring his salary to €500,000, in line with the government cap on state-guaranteed lenders.
The Irish Independent has also learned that the half-million-euro cap on top bankers' pay does not include the value of their pension contributions.
On top of his basic €500,000 salary, Bank of Ireland chief executive Richie Boucher was also entitled to a €220,000 pension contribution from the bank, but voluntarily agreed to reduce this to €123,000.
When asked whether Mr Doherty's pension would bring his package above €500,000, an AIB spokesperson said the cap was on salary and that his remuneration was "fully compliant with terms agreed with the Department of Finance".
It also emerged that large investment funds put intense pressure on AIB over the past week to make sure that chairman Dan O'Connor would take on the executive chairman role for just six months to ensure a smooth transition period.
Mr Doherty is then likely to become sole chief executive.
Mr Lenihan vetoed AIB's initial plan of naming Mr Doherty as chief executive, but it is believed his title will eventually change to this when the whole management structure comes up for review next year.
AIB yesterday said it now expected losses on bad loans to hit €5.3bn this year -- €1bn more than previously estimated. The increase is largely due to the bank trying to absorb as much as possible of the losses on the €24bn loans it is transferring to NAMA as quickly as possible.
AIB also confirmed yesterday that the outgoing chief executive of the National Treasury Management Agency, Michael Somers, would be appointed as deputy chairman of the banking group. His brother, businessman Bernard Somers, was a director until last December.
Mr Lenihan last night attempted to play down talks of a rift between the Government and AIB, insisting that relations were "okay now".
But government sources expressed amazement at the lack of political and media awareness within AIB.
AIB claimed it was having difficulty attracting candidates for the post, not just because of the salary cap but also the level of media scrutiny. The bank said it looked all around the world for a suitable person.
Eyeballing
AIB non-executive director Sean O'Driscoll rejected the accusation the bank was giving two fingers to the taxpayer and the Government. "AIB, or the director of AIB, are not in the business of eyeballing the Government," he said.
Fine Gael's enterprise spokesman Leo Varadkar said the key point was not the salary cap, but the appointment of an "inside man", rather than an external appointment.
"The banks wanted an insider for this job. They've got that. He's lost,"he said.
Labour finance spokesperson Joan Burton claimed the "old guard" was still operating in the banks.
The Irish Independent also reports that fraud is a growing problem for Irish business but the levels of crime are no worse here than elsewhere in Europe, according to a PricewaterhouseCoopers survey of 3,000 respondents in 54 countries and the Paris-based INSEAD business school.
Nearly three-quarters of Irish respondents to suffer from economic crime saw an increase in the crime last year compared to 40pc in Western Europe. Some 26pc of all Irish respondents said they experienced such crime last year, similar to Western European levels. A fifth of Irish respondents said the loss caused by the crime was more than €3.3m compared with 8pc in Europe.
The most common types of fraud in Ireland were theft, financial statement fraud and money laundering although market fraud and intellectual property infringement were also significant. "The survey suggests that fraud and economic crime is becoming an issue in Irish business, not least as a direct consequence of the downturn," said PWC forensic expert Billy O'Riordan.
"Organisations need to ensure that when a fraud or economic crime occurs they have an enforceable and enforced policy where people do not appear to 'get away with' it and that the appropriate forensic investigations are carried out."
The main drivers of fraud were companies' failure to pay bonuses, more difficult targets for employees and fear of losing a job. Fewer management controls and management focus on survival were also factors that increased the likelihood of fraud happening.
"The economic downturn has heightened the pressures and incentives to commit fraud," Mr Semple said."In these tough times, the temptation to take part in a fraud may overcome ethical values. In an economic downturn, financial targets are more difficult to achieve and individuals may feel pressurised and their personal financial position may be threatened by reductions in pay or layoffs."
In Ireland, half of the most serious crimes were detected by risk management systems and internal audit while a quarter of the fraud was detected by informal tip-offs.
The Irish Times reports that Allied Irish Banks (AIB) has yet to reach agreement with the Government on the annual salary to be paid to Dan O’Connor who was named executive chairman of the bank yesterday in the long-awaited management reshuffle.
The bank confirmed Mr O’Connor’s appointment to his enhanced role and the promotion of senior AIB executive Colm Doherty to the new role of group managing director of the bank.
Mr Doherty has agreed to the reduced salary of €500,000 after the Government rejected the bank’s proposal to breach the State pay cap for top bank executives and approve the retention of his existing salary of €633,000.
An AIB spokeswoman said Mr O’Connor’s pay would be agreed with the Department of Finance and declined to comment further before the salary was approved.
A spokesman for the department said that no discussions were ongoing with the bank on the issue. The bank has yet to submit details of Mr O’Connor’s proposed salary to the department.
His predecessor, Dermot Gleeson, received annual remuneration of €390,000 after taking a pay cut from €520,000 following the bank guarantee. The Government-appointed committee on bankers’ pay had recommended that the chairman of AIB receive annual fees of €276,000 a year. Mr O’Connor has assumed much greater responsibilities as executive chairman which may lead to a higher pay package.
The protracted process to find a new management team at AIB led to the appointment of insiders to the two most senior roles within the bank in a compromise deal between AIB and the Government.
AIB director Seán O’Driscoll, who played a central role in the appointments, said that the indication from the Government was “a very strong preference for an external candidate” to be installed as the new chief executive. However, Mr O’Driscoll told RTÉ radio that the Government’s €500,000 pay cap and “the constant media attention and scrutiny” made it difficult for AIB to find an external replacement.
He declined to discuss details of discussions with the Minister for Finance or Government officials on the bank’s proposal to pay Mr Doherty a salary above the cap.
“The directors of AIB are not in the business of eyeballing a Government or, as somebody said, giving one finger to the taxpayer and one finger to the Government,”he said.
The bank said that Mr Doherty had agreed to a salary that was “considerably lower” than his existing pay and the salary paid to chief executives in the past, “reflecting his personal commitment to the bank and its future”.
Former tánaiste Dick Spring, a Government appointee director at AIB, said that “an exhaustive, comprehensive and independently assessed search” was carried out and Mr Doherty emerged as the best candidate from the process.
AIB confirmed that it intends to appoint two outsiders to the key roles of finance director and chief risk officer, while Dr Michael Somers, who is retiring as head of the National Treasury Management Agency, will take up the post of deputy chairman of the bank.
It is understood that prior to the appointments, the Irish Association of Investment Managers (IAIM), which represents institutional investors in the banks, including AIB, raised concerns about good corporate governance within the bank relating to the role assumed by Mr O’Connor.
The bank said that his appointment as executive chairman would be “on a temporary basis” to oversee the raising of further capital, the movement of loans to the National Asset Management Agency and the bank’s restructuring plan.
Fine Gael deputy leader Richard Bruton said important questions remained about the appointments before the Government agreed to the decision.
He said AIB should be asked to spell out which international firm of head-hunters, specialising in financial services, was hired for the search, how many CVs were submitted to the board subcommittee and how many candidates were interviewed.
The Irish Times also reports that Aer Lingus has warned that it may have to introduce additional job losses – some possibly on a compulsory basis – if there is no agreement reached with trade unions on a controversial €97 million cost-saving plan before the end of the month.
In a statement issued following a meeting of its board of directors yesterday, the airline said its operating environment remained extremely challenging.
In this context, it said that if it the airline was to maintain its present scale of operations, it was essential that it urgently achieved the full €97 million in savings outlined in a transformation plan produced last month.
This reform plan involves more than 670 job losses at the company.
Aer Lingus had initially set a deadline of last Tuesday for completion of negotiations on the plan with trade unions. However, it accepted an invitation from the National Implementation Body to avail of the services of the Labour Relations Commission (LRC) in a bid to conclude an agreement.
The company said yesterday that, at the conclusion of the talks under the auspices of the LRC on November 30th, the board and management would meet to consider the results.
“In the event that the required €97 million savings have not been agreed in full, the board and management will proceed to implement an alternative means of delivering the savings within the same timeframe set out under the plan,” the company said.
“These alternative means will include further reductions in capacity resulting from an uneconomic cost base, which in turn will lead to additional redundancies beyond those included in the plan.
“While the preference will be for such redundancies to be on a voluntary basis, compulsory redundancies cannot be ruled out.”
Aer Lingus said its board would closely monitor progress at the LRC talks over the coming week.
The trade union Impact, which represents pilots and cabin crew at the airline, did not comment last night on the Aer Lingus statement.
Management and the Irish Airline Pilots’ Association will today discuss the proposed restructuring at Aer Lingus and pay levels when they address the Oireachtas Joint Committee on Transport.
Aer Lingus had net cash of €399 million at the end of September. This compared with €653.9 million a year earlier and reflected a €107 million charge for restructuring costs and payments for two new A330 aircraft.
The airline has struggled this year. Its revenues fell by 9.7 per cent year on year between July and September. The number of passengers was down 7 per cent to 3.08 million. Analysts expect Aer Lingus to lose more than €90 million this year.
The Irish Examiner reports that Ryanair has confirmed it has cut 17 routes from Shannon Airport from the end of March resulting in the loss of 150 jobs and a 75% cut in capacity.
The airline said any passengers that booked flights after that date will be informed by the airline and refunded.
The 17 routes will be axed from 28 March.
The aircraft which were due to operate the routes will be redeployed to other Ryanair bases in Belgium, Holland and Spain which the airline said have axed tourist taxes or reduced airport charges, in some cases to zero.
Ryanair spokesman Stephen McNamara said: "These bases will enjoy increased passenger traffic, tourism revenues and thousands of new jobs, while Irish tourism and travel collapses as a result of Shannon Airport’s refusal to compete with other European airports and the Irish government’s suicidal €10 tourist tax."
Passenger numbers at Shannon will be reduced from a 2007 high of 3.6 million to about 1.25m a year if a replacement carrier is not identified.
A five-year deal between Ryanair and the airport on charges and passenger numbers concludes around the same time that the airline is axing the routes and the Shannon Airport Authority has said it will not enter a new five-year deal due to what it says are Ryanair’s unreasonable demands.
Ryanair is understood to be seeking a 50% cut in its operating costs at Shannon.
The airline will reduce the number of aircraft based at Shannon from four to one.
The flights being cancelled are Alicante, Birmingham, Bristol, Brussels, Carcassonne, Edinburgh, Faro, Girona, Glasgow, Gran Canaria, Krakow, Lanzarote, Liverpool, Lodz, Milan and Murcia and Venice.
The remaining flights are to London Gatwick, Stansted, Malaga, Nantes, Palma, Paris and Tenerife.
The Financial Times reports that the Bank of England’s outlook for medium-term growth is now the strongest of any forecast it has made since it was granted independence in 1997, in stark contrast to the downbeat message delivered by governor Mervyn King just a week ago.
Its central growth forecast for 2010 is 2.2 per cent, far higher than predicted either by the Treasury or the average of private sector economists polled by the Treasury.
The Bank’s central forecast for 2011 is for growth of 4.1 per cent – the highest in 12 years.
The Bank – which regularly irritates economists by refusing to release the numbers behind its GDP and inflation forecasts when it issues its inflation reports, leaving analysts to guess at the figures from “fan” charts in the reports – on Wednesday unveiled its revised forecasts together with the hard data.
Even after taking account of downside risks that Mr King spelled out in gloomy detail last week – such as the effects of sharp fiscal tightening and continued dislocation in credit markets – the Bank forecast growth rates of 1.5 and 3.1 per cent in 2010 and 2011 respectively.
“It is staggering to have these sorts of growth numbers and that sort of outlook,” said Brian Hilliard, economist at Société Générale .
He noted that the Bank’s “backcast” of how previously reported GDP numbers are revised reveals that it expects the contraction of 0.4 per cent in the third quarter of this year, reported last month, to be revised to a more modest decline of 0.2 per cent.
Mr King went to great lengths last week to spell out just how far the UK still needs to go to recover from the slump. “Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. “We have ... only just started along the road to recovery.”
The Bank also made big upward revisions on Wednesday to its inflation forecasts. Consumer price inflation in the first quarter of 2010 is now expected to rise to 2.7 per cent, up from a forecast of 0.8 per cent in May 2009.
“The scale of the upward revision, despite weaker-than-expected real GDP, reflects the extent to which the monetary policy committee has failed to take enough account of the lagged inflation boost from the weak pound,” said Michael Saunders, economist at Citi.
The FT also reports that the French state tradition of economic activism will get a new lease of life today with proposals to invest €35bn of government borrowing in long-term research and industrial projects designed to lift the country’s trend rate of growth.
The “national bond” is Nicolas Sarkozy’s flagship initiative for the second half of his presidency. It is intended to mobilise public support around a spending programme to boost competitiveness at a time when public confidence in economic recovery is low.
But Mr Sarkozy’s original idea of raising some of the money through retail savers – turning it into a popular bond, as under previous governments – has been deemed too expensive.
Michel Rocard and Alain Juppé, two former prime ministers commissioned by Mr Sarkozy to draw up priority areas for investment, will present their findings on Thursday.
The biggest winners were likely to be universities and research, which would be earmarked to receive €16bn (£14bn, $24bn), Mr Rocard said on Wednesday. Much of this is likely to be ploughed into university endowments.
Mr Rocard and Mr Juppé will also recommend investing in life sciences, green transport technologies such as car batteries and lightweight materials for aviation, and renewable energy, including fourth-generation nuclear power and carbon capture and storage.
The size of the bond has been the subject of heated debate inside the government, with some members of the centre-right UMP party pushing for up to €100bn while the prime minister, the finance ministry and deputies concerned about France’s precarious public finances urged restraint.
In the end, the state will borrow €35bn for the scheme. New debt issuance will be €22bn because €13bn will come from state aid repaid by French banks this year.
“The Treasury says that a bond of €20bn-€22bn does not bring into question France’s creditworthiness,” Mr Rocard said.
The government would have to offer a premium to attract retail investors, which was“not worth the bother”.
Mr Sarkozy has likened his national bond scheme to far-sighted decisions by previous presidents to invest in high-speed rail or nuclear power, two of France’s biggest commercial assets.
But rather than resuming a policy of picking winners, the bond is aimed at earlier-stage research. It will be used to leverage private capital, and grants will be allocated through competitions. Nonetheless, the president’s objective of raising trend growth through higher borrowing is controversial, given the lack of a credible plan to cut France’s public deficit – forecast to reach 8.5 per cent of gross domestic product next year – and its spiralling debt.
Martine Aubry, leader of the opposition Socialists, attacked the initiative, first announced in June, as a media stunt. “All that to do what all countries do and what France does every day, that is to say continue to borrow on the financial markets,” he said.
The New York Times reports that Democratic leaders in the Senate on Wednesday unveiled their proposal for overhauling the health care system, outlining legislation that they said would cover most of the uninsured while reducing the federal budget deficit.
Senator Harry Reid of Nevada, the majority leader, said at an evening news conference that the legislation, embodying President Obama’s signature domestic initiative, would impose new regulations on insurers, extend coverage to 31 million people who currently do not have any and add new benefits to Medicare.
Mr. Reid said the bill, despite a price tag of $848 billion over 10 years, would reduce projected budget deficits by $130 billion over a decade because the costs would be more than offset by new taxes and fees and by reductions in the growth of Medicare.
Democrats expressed confidence that they would have the votes needed to move forward when the legislation hits its first test in the Senate, probably later this week. To get past that first procedural hurdle, Mr. Reid will need the votes of all 58 Democratic senators and the two independents aligned with them.
That vote would clear the way for what is sure to be an unpredictable roller-coaster ride of a debate on the Senate floor through much of December. Earlier this month the House passed its version of the health care legislation.
Republicans have vowed to fight the legislation at every turn, saying it represents a dangerous expansion in the role of government that would increase taxes and insurance costs for millions of people. “It’s going to be a holy war,” said Senator Orrin G. Hatch, Republican of Utah.
Under Mr. Reid’s bill, the government would establish a new public insurance plan, which would compete with private insurers. States could opt out of the public plan by passing legislation.
In one last touch on Wednesday, Mr. Reid and his aides finally named the bill that he wrote over the last few weeks, selecting parts of bills previously adopted by two Senate committees. It is called the Patient Protection and Affordable Care Act. “This legislation is a tremendous step forward,” Mr. Reid said. “It saves lives, saves money and will make Medicare stronger.”
Though broadly similar to the House bill, Mr. Reid’s proposal differs in important ways. It would, for example, increase the Medicare payroll tax on high-income people and impose a new excise tax on high-cost “Cadillac health plans” offered by employers to their employees.
Mr. Reid’s bill would not go as far as the House bill in limiting access to abortion. And while he would require most Americans to obtain health insurance, he would impose less stringent penalties on people who did not comply.
Many provisions of Mr. Reid’s bill, including the creation of insurance markets, or exchanges, would take effect in 2014, a year later than similar provisions of the House bill. The delay is intended primarily to reduce the cost of the legislation.
Both bills would create a voluntary federal program to provide long-term care insurance and cash benefits to people with severe disabilities.
Desperately seeking money to pay for the legislation, Mr. Reid came up with a new source of financing: a 5 percent tax on elective cosmetic medical procedures. The tax would be paid by patients, but collected by doctors and clinics and forwarded to the government.
The tax would be calculated as 5 percent of the amount paid for an elective cosmetic procedure, whether by the patient, insurance or other sources. The tax would not apply to cosmetic surgery for people with congenital abnormalities, disfiguring diseases or traumatic injuries.
The official cost analysis released by the nonpartisan Congressional Budget Office shortly after 11 p.m. showed that Mr. Reid’s bill came in under the $900 billion goal suggested by Mr. Obama. But 24 million people would still be uninsured in 2019, the budget office said. About one-third of them would be illegal immigrants.
The Congressional Budget Office has said the House bill would reduce deficits by $109 billion over 10 years and cover 36 million people, but still leave 18 million uninsured in 2019.
Republicans and some independent budget analysts said, however, that the savings might not be fully achieved because they were based on unrealistic assumptions about a sustained increase in the productivity of health care providers and much slower growth in Medicare spending.
Rahm Emanuel, the White House chief of staff said Mr. Reid’s bill was impressive. It “meets the president’s objectives, provides protection from insurance companies, contains true cost controls and extends coverage to working families,” Mr. Emanuel said.
Senate Democratic leaders were still trying frantically on Wednesday to nail down a few of the 60 votes needed to begin debate on the legislation.
Vice President Joseph R. Biden Jr. and Interior Secretary Ken Salazar, both former senators, were on Capitol Hill, trying to help Mr. Reid round up votes.
The proposed tax on “Cadillac health plans” is among the most contentious provisions of the bill.
Under the Finance Committee bill, the government would have levied a 40 percent tax on the value of insurance exceeding $8,000 for individual coverage and $21,000 for family coverage, with some exceptions.
Under Mr. Reid’s bill, the tax would kick in at higher thresholds, $8,500 for individuals and $23,000 for families.
Some economists say the tax could slow the growth of health spending by encouraging employers to pare back health benefits. Many labor unions oppose the tax, saying it would hit many middle-income workers who have sacrificed wage increases to secure or retain health benefits.
The proposed increase in the Medicare payroll tax is another major new feature of Mr. Reid’s bill. Under current law, employers and employees each pay a tax equal to 1.45 percent of wages. Mr. Reid would increase the rate to 1.95 percent for individuals with annual incomes over $200,000 and couples over $250,000. The tax on employers would be unchanged.
Senate Democratic aides said the payroll tax increase would raise $54 billion over 10 years.
By contrast, the main source of new revenue in the House bill is a surtax on high-income people. The tax would be 5.4 percent of adjusted gross income exceeding $1 million for couples and $500,000 for individuals.
Mr. Reid’s bill would also raise revenue by levying annual fees on health insurance companies and pharmaceutical manufacturers. The Finance Committee would have imposed fees of $4 billion a year on manufacturers of medical devices, but Mr. Reid decided to cut those fees by half.
Under the bill, most people would be required to carry insurance. A person without insurance could be required to pay a financial penalty, starting at $95 in 2014 and rising to $750 in 2016, with a maximum of $2,250 for a family.
The Senate bill would not explicitly require employers to offer health insurance coverage. But if an employer with more than 50 employees does not offer coverage and if any worker qualifies for a federal subsidy, the employer would have to pay a penalty, typically $750 for each of its employees.
The NYT also reports that the coroner’s report left no doubt as to the cause of death: toxic loans.
That was the conclusion of a financial autopsy that federal officials performed on Haven Trust Bank, a small bank in Duluth, Ga., that collapsed last December.
In what sounds like an episode of “CSI: Wall Street,” dozens of government investigators — the coroners of the financial crisis — are conducting post-mortems on failed lenders across the nation. Their findings paint a striking portrait of management missteps and regulatory lapses.
At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.
What went wrong? In many instances, the financial overseers failed to act quickly and forcefully to rein in runaway banks, according to reports compiled by the inspectors general of the four major federal banking regulators. Together, they have completed 41 inquests and have 75 more in the works.
Current and former banking regulators acknowledge that they should have been more vigilant.
“We all could have done a better job,”said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.
The reports, known as material loss reviews, delve into the past, but their significance lies in how they might shape the future. As another wave of bank failures looms, policy makers are considering a variety of measures that would generally strengthen banks’ finances and limit their ability to lend money aggressively in risky areas like construction. Bankers contend that such steps would not only hurt their businesses but also the broader economy, because they would throttle the flow of credit just as growth is resuming.
But while the worst seems to be over for the banking industry as a whole, many lenders are still in danger. The havoc caused by the collapse of the housing market is now being exacerbated by the deepening problems in commercial real estate, which many analysts see as the next flashpoint for the industry.
Given the past lapses, some wonder whether examiners will spot new troubles in time. Of the nation’s 8,100 banks, about 2,200 — ranging from community lenders in the Rust Belt to midsize regional players — far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators, according to Foresight Analytics, a banking research firm.
About 600 small banks are in danger of collapsing because of troubled real estate loans if they do not shore up their finances soon, according to the firm. About 150 lenders have failed since the crisis erupted in mid-2007.
Many bank examiners acknowledge they were lulled into believing the good times for banks would last. They also concede that they were sometimes reluctant to act when troubles surfaced, for fear of unsettling the housing market and the economy.
Then as now, banking lobbyists vigorously opposed attempts to rein in the banks, like the 2006 guidelines that discouraged banks from holding big commercial real estate positions.
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”
Haven Trust, founded in 2000, enjoyed a light touch from its regulators, according to its autopsy, which was completed in August.
Almost from the start, examiners with the F.D.I.C and the state of Georgia raised red flags. In 2002, F.D.I.C. officials found problems with the bank’s underwriting practices. Over the next few years, Haven’s portfolio of risky commercial real estate loans grew so quickly — by an astounding 40 percent annually — that the regulators raised questions about the dangers.
But not until August 2008 did examiners step up their scrutiny by telling Haven to raise its capital cushion. A month later, the regulators issued a memorandum of understanding, known as an M.O.U., ordering the bank to limit its concentration of risky loans.
Haven’s examiners “did not always follow up on the red flags,” says the report, which runs 29 pages. “By the time the M.O.U. was issued in September 2008, Haven’s failure was all but inevitable,” it concluded.
But the fiasco at Haven Trust was not all that unusual. At the fast-growing Ocala National Bank in Florida, for example, examiners from the Office of the Comptroller of the Currency found loose lending standards and a high concentration of construction loans.
But regulators “took no forceful action to achieve corrections,” according a review after the failure. The bank collapsed in late January.
At County Bank in California, a potential powder keg of construction and land loans warranted “early, direct and forceful” action from the Federal Reserve Bank of San Francisco, according to a review of the failed lender, which collapsed in early February.
Regulators have begun to act on some of the lessons learned. Federal officials are discussing whether to impose hard limits, not just soft guidelines, on the portion of bank balance sheets that can be made up of commercial real estate loans. That would automatically prevent the buildup of risky assets and take more discretion out of the examiners’ hands.
Other ideas include requiring all lenders to hold more capital if they report big concentrations of risky assets or rapid loan growth — an approach that is the centerpiece of the Obama administration’s policy for too-big-to-fail banks.
Daniel K. Tarullo, the Federal Reserve governor overseeing bank supervision, recently proposed to impose new rules that would require banks to raise capital in the event they breach certain financial thresholds in areas like loan delinquencies or defaults.
At the F.D.I.C., Ms. Bair has been increasing the hiring of experienced examiners in the last few years, and recently empowered its on-site supervisors to impose restrictions on dividends, brokered deposits and loan growth. Every major regulator has urged examiners to take swifter action and issue more formal enforcement orders.
Still, banking executives and some regulators worry that after the long period of lax oversight chronicled by the reports, regulators will crack down too hard. The challenge, these people say, is to strike a balance between rigorous oversight and oppressive regulation. A heavy hand might discourage banks from lending.
“Right now, bankers don’t need to be told it is a dangerous world,” said William M. Isaac, the former F.D.I.C. chairman and now a regulatory consultant.“Right now, they need to be told there will be a tomorrow.”
