Blanaid Clarke (Audit Committee Chair) authors chapter in book ‘Pandemic Crisis and Financial Stability’ – read excerpt


Excerpt from Chapter on ‘Cultural reforms in Irish banks. Walking the walk during the COVID-19 pandemic’, authored by Blanaid Clarke, Audit Committee Chair, in new e-book “Pandemic Crisis and Financial Stability published by European Banking Institute”. Download the chapter here or get the full book from

Cultural reforms in Irish banks. Walking the walk during the COVID-19 pandemic

Blanaid Clarke 1


This chapter considers whether the previous global shock to hit the banking sector, the Global Financial Crisis in 2008 (‘the GFC’), and more particularly the governance reforms which it engendered, underlines the sector’s response to the economic crisis which the COVID-19 pandemic has wrought. It will focus on the position of the Irish retail banks and the changes to culture and behaviour which were introduced since then.

The GFC has been attributed to a number of factors including inadequate financial services regulation and supervision, excessive borrowing, risky investment products, a lack of transparency and corporate governance failings. 2 The most immediate response in the EU was to strengthen the prudential framework and the recovery and resolutionregimes. As a result, the banks are in a stronger position in terms of capital and liquidity to withstand the current economic tsunami. The regulatory focus then turned to governance and cultural issues within the banks. The Capital Requirements Directive 2013/36/EU (‘CRD IV’) requires banks to have robust governance structures and arrangements in place to promote sound and effective risk management. 3 Competent authorities in their annual supervisory reviews are tasked with ensuring that this is the case and including within their scope corporate culture and values. 4 Standards of fitness and probity were also prescribed for directors to ensure their suitability. 5 In this area, progress may have been slower, and the 2019 Supervisory Review and Evaluation Process indicated that governance remains a risk area of particular supervisory concern, highlighting inter alia the limited effectiveness of management bodies and weaknesses in internal controls. Mark Carney, the then Governor of the Bank of England, observed that progress risks being ‘overshadowed by a crisis of legitimacy’ caused by incidents of misbehaviour and cultural failuresacross the world since the GFC. 6 These included the fixing of LIBOR by major banks across the world, mis-selling payment protection insurance in UK banks and money laundering investigations involving Danish, Swedish, and German banks. Although the 2020 Edelman Global Trust Barometer revealed increasing levels of trust in financial services over the last eight years, it still remained low at 56 %, and the sector was the last in the nine industry sectors examined. 7

In Ireland, the effects of the GFC were particularly severe and rescuing the banks alone cost the State an estimated €41.7 billion, plus an additional €1 billion annually to service the interest on the debt. 8 Three government commissioned reports and one Parliamentary Banking Inquiry report have been published on the Irish banking crisis, and the consensus is that although it bore ‘the clear imprint of global influences’, it was in crucial ways ‘home-made’. 9 It involved a property bubble, compounded by: an exceptional concentration of lending largely for commercial property purposes; poor supervision; weak corporate governance; and inadequate risk management and controls. 10 In relation to the latter, the Banking Inquiry criticised the decisions of bank boards, managers and advisors to pursue risky business practices to protect their market share and increase profits with undue consideration or appreciation for the consequences of their actions. 11 Unfortunately, since then, further examples of misbehaviour havecome to light. The manner in which the banks treated retail customers on valuable tracker-mortgages since 2010 led to an examination by the regulator, the Central Bank of Ireland (‘CBI’), and subsequently to the payment of €683 million in redress and compensation to over 40,000 affected customers. 12 Enforcement investigations are ongoing, and already one of the banks has been fined for regulatory breaches with the CBI’s Director of Enforcement noting ‘Where firms fail to protect their customers’ best interests, ourresponse will be robust and the consequences will be serious.’ 13

It is important to note at the outset that the current economic crisis caused by the COVID-19 pandemic (‘theCOVID Crisis’) differs in significant ways from the GFC. Firstly, it is likely to be even more financially devastating than the GFC. The International Monetary Fund has predicted that the global economy will contract sharply by -3 % in 2020 and in the euro area countries, the contraction is projected at -7.5 %. 14 Ireland is an open economy, and the CBI has estimated that Irish real GDP could decline by around 8 % in 2020 with the unemployment  rate  reaching  a  peak  of  around  25 %  in the second quarter of 2020. 15 Secondly, the COVID Crisis is a health crisis as well as an economic crisis. The objective of the initial public policy response related to the former, ensuring the hospital systems were not overwhelmed and the ‘curve is flattened’ whilst seeking to protect economies. In most European countries this involved putting them into a form of temporary cold-storage. The duration of the COVID Crisis will depend to a large extent on the progress of the virus, the development of vaccine and therapeutic treatments and the availability of effective testing capacities – all of which are difficult to predict at this time. This means in turn that, as the European Commission has acknowledged, ‘the danger of a deeper and more protracted recession is very real’. 16 Thirdly, and of particular importance in the context of this chapter, unlike the GFC, the banks have an opportunity to be part of the solution at this stage rather than part of the problem.

Part II of the chapter will examine the sources of bank culture and the importance of defining, establishing and embedding an appropriate culture and value system within banks. Part III sets out a brief review of stakeholder theories, the purpose of banks and their responsibilities to their customers and the wider community. Part IV will analyse the changes which have taken place in Irish banking culture since the GFC and consider whether a customer-focused culture might be said to be reflected in their recent actions. As has been noted, ‘an avowed commitment to higher standards may mean little in itself without something to back it up’. 17

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1 The cut-off date for information included in this article is 6 May 2020.

2 See, e.g., Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (2011), Financial Services Authority, The Turner Review: A RegulatoryResponse to the Global Banking Crisis (2009), European Commission, Report of the [De Larosière] High Level Group on Financial Supervision in the EU (2009) and Grant Kirkpatrick ‘The corporate governance lessons from the financial crisis’ (2009) OECD Journal: Financial Market Trends 61.

3  Directive 2013/36/EU, article 74(1).

4  Directive 2013/36/EU, article 98(7).

5 Directive 2013/36/EU, article 91(1). See also ESMA and EBA, Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU, EBA/GL/2017/12.

Mark Carney ‘Policy Panel: Investment and Growth in Advanced Economies’ (Remarks at the 2017 ECB Forum on Central Banking,Sintra, 28 June 2018)

7 Edelman Trust Barometer 2020: Global Report

8 The Comptroller and Auditor General, Report on the Accounts of the Public Services 2018.

Klaus Regling and Max Watson, A Preliminary Report on the Sources of Ireland’s Banking Crisis 5, (Government Publications Office, 2010)

10 See further Blanaid Clarke and Niamh Hardiman, ‘Crisis in the Irish Banking System’ in Sue Konzelmann (ed) Banking Systems in theCrisis: The Faces of Liberal Capitalism. (Routledge, 2012).

11 Joint Committee of Inquiry into the Banking Crisis, Report of the Joint Committee of Inquiry into the Banking Crisis (2016)

12 Central Bank of Ireland, Final Report of the Tracker Mortgage Examination (July 2019)

13 Central Bank of Ireland, ‘Public Statement Relating to Enforcement Action Against Permanent TSB plc’ (19 July 2019)

14 IMF, World Economic Outlook April 2020

15 Central Bank of Ireland, Quarterly Bulletin No.2 of 2020

16 European Commission, Spring 2020 Economic Forecast (May 2020)

17 William Blair and Clara Barbiani ‘The Beauty of Ethics: Towards Re- Establishing Trust in the Financial Sector’ (2019) 6 Pensamiento Social 79.