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UniCredit breached liquidity requirements in 2007.  Matthew Elderfield nods.  The interconnectedness of banking dysfunctionality. Michael Smith There is a general official view that Ireland’s ethical delinquencies are in the past.  Corrupt planning stopped when the tribunals started; and bad bank-regulation stopped with the demise of Pat Neary and the production of two limited and innocuous reports by Patrick Honohan and Klaus Regling. Inconveniently for a country that has started to see regulation in black (then) and white (now) terms, the general view does not reflect the reality. Hold tight for a mind-boggling trip through the complexity of banking dysfunctionality. Liquidity is the short-term financing vital to ensure the banks still do their core job of funding the economy.  Somehow Ireland went from having liquid banks to having banks so illiquid that a bank guarantee was offered by the government in September 2008.  But there are staff in every bank legally charged with ensuring banks do not become illiquid.  There is an intricate and comprehensive system in place to ensure they cannot become illiquid, bearing in mind their customer base.  It involves arrangements they must have in place if for some reason they become illiquid e.g. they can ask another named financial institution to lend them money short-term.  Every morning the banks have to produce a report showing how they kept their liquidity up to the target the previous day.  The measure used for the target is the ‘liquidity ratio’. In mid 2007 the financial regulator, Pat Neary  – following a six-month ‘dry-run’ –  introduced a new rule for the liquidity ratio implementing the latest Basel banking accord.  It required that cash inflows equalled at least 90 per cent of cash outflows forecast over the relevant period. This prudential system was, and is, central to how banking is possible.  The system was intended to be stringently monitored by the financial regulator. In fact Village has evidence that a failure of liquidity, that if it  – as may well have been the case – was typical to both Irish banks and foreign-owned subsidiaries,  shows dysfunctionality on a scale that should have prompted the financial regulator to advise the government to go out into the markets and get funds for the banks immediately, was ignored by the regulator. Nor did auditors pick up on it.  Indeed it is highly likely that liquidity problems were dysfunctionally glossed over by auditors all over Dublin’s financial world around this time. If such dysfunctionality had not occurred and been ignored for so long after the collapse of Northern Rock, Ireland could have dealt with general bank liquidity in a structured and gradual way – and not purportedly needed the bank guarantee that has finished up bankrupting the country and immiserating much of the population. The people behind this dysfunctionality should be made to account for it.  The new regulator, Matthew Elderfield,  should explain what went on on his predecessor’s watch so we can see what happened.  Instead it appears the new regulator is being disingenuous. In late July or early August 2007, an experienced financial risk-manager,  says he discovered his employer bank – the Irish subsidiary of the giant UniCredit Bank of Italy –  had been dramatically breaching the liquidity ratio. The risk-manager maintains he was specifically warned by senior personnel at the Irish subsidiary not to report the matter to the financial regulator in Ireland. On one occasion he reported a ratio of only 70% to the regulator (and obtained a receipt). In fact he says “I was getting 75%, even 65%, not occasionally but day in, day out. Banks are obliged by law to maintain all daily records for at least five years so there must be written evidence of this.  At the time, I thought: ‘Is it my fault?’  Then I asked questions and I was told ‘it’s a system error’ or ‘a trader forgot to book a deal’ or ‘it’s complicated.  Give it a bit more time and you’ll understand.  It will be fine’”. In any event, even if taken at face value, such failures would attract penalties under Sections 3.4 and 10 of the regulator’s Requirements for Management of Liquidity Risk, 2006, which seem to impose fairly strict liability. Ascertaining the liquidity ratio is a complex task and eventually the risk-manager turned to a consulting company in London for help, affording it access to UniCredit’s systems.  That company – a company which continues to provide such services for some of Ireland’s most well-known banks – calculated the liquidity ratio at an extraordinary 50% when a ratio of 89% would in normal circumstances be deemed problematic. The risk-manager resigned, in part fearful  of the draconian penalties that applied for breach of the law. A simple call to UniCredit’s Milan-based parent could have been expected to generate a transfer of many billions of Euro within a few hours, so resolving the problem.  But that would have undermined the parent bank’s confidence in its Celtic subsidiary, and perhaps jeopardised bonuses against a background where the previous year’s final accounts had anyway required substantial and embarrassing revision to the tune of tens of millions of Euro. Around  two weeks later the financial regulator came in  on a scheduled inspection. It appears all hell then broke loose with the regulator effectively taking over the firm for two weeks.  During this period the arrangement with the expert London consulting company was terminated, so it may have proved difficult for the regulator to ascertain the prevailing liquidity ratio.  The risk-manager was warned by his former employers that repeating his story “to a third party would constitute grounds for a claim of defamation which we would not hesitate to pursue”. Solicitors McCann Fitzgerald wrote to him on their behalf advising that his allegations were “outrageous”. They have claimed the same to Village. What is surprising is the reluctance of Irish authorities, and indeed Irish politicians, government and opposition alike, to make the running with this still unresolved issue. The honourable exception is Senator David Norris who outlined the events described above and pushed the