Dr. Earl R. Smith II

Monday November 17 2008

It’s not an exaggeration to describe Bank of Ireland as a calamity. That certainly must be the view of the 74,000 people who own up to 10,000 shares in the bank.

At the peak last year, each of those shares was worth €18, and now the share price is hovering just above €1. Collectively, those small shareholders, many of them elderly, have seen €2bn of their wealth evaporate.

Larger shareholders, such as pension funds, must also be dismayed. Since February 2007, the stock market has marked down the value of Bank of Ireland by €16bn.

The situation is so bad that, for the first time in living memory, the dividend has been scrapped.

What may puzzle shareholders is how it went so badly wrong. Bank of Ireland, established in 1782, used to have a reputation for being conservative, even old-fashioned.

Other banks have a board of directors but Bank of Ireland has a court, and the board chairman carries the title of ‘Governor’.

Leaf through the annual report and you get the impression that Bank of Ireland lends money reluctantly. The section explaining the bank’s risk management policies runs to 16 pages.

We learn that proactive identification and management of risk “underpins” operations. Bank of Ireland has a Group Risk Policy Committee, headed by the Chief Risk Officer.

This committee has oversight of the Group Credit Committee, the Portfolio Review Committee, the Asset and Liability Committee and the Risk Measurement Committee — to name but a few.

Now it looks like another committee will have to be set up to review the workings of these committees. Because, for all the oversight, the interim results issued last week suggest an attitude to risk more appropriate to JP McManus.

The results revealed that €9.8bn of the bank’s loans have increased risk profiles that are subject to closer monitoring and scrutiny.

Other loans, not in arrears but described as “lower quality” and amounting to €1.4bn, require a “workout of the relationship”.

On the investment side, the scorecard for the bank’s liquid asset portfolio shows that losses on asset-backed securities and bonds have escalated by €640m over the past year.

Who’s to blame for this financial carnage? Though chief executive Brian Goggin takes the heat publicly, the buck stops at board level.

The “group risk framework” is decided upon by the board, which is responsible for deciding on the nature and scale of risk that the bank is prepared to take on.

It’s notable that of the 10 non-executive officers and directors on the board, only two people — George Magan and Dennis Holt — have banking experience, and that was in the UK.

It’s hard to avoid the conclusion that Bank of Ireland is a calamity because its corporate governance framework is entirely inadequate — and that’s putting it politely.

Nick Mulcahy is editor of Business Plus magazine

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