Lane says financial institutions ‘must adapt’ to post-crisis reality

Financial institutions must adjust to a new "post-crisis regulatory environment" which requires shifts in conduct and a more restrictive approach to balance sheet management, the Governor of the Central Bank has said.

Prof Philip Lane was speaking at the inaugural European Financial Forum in Dublin Castle on Wednesday where financial institutions, policy makers, entrepreneurs and innovators debated a range of key challenges facing the European and global financial services sector.

During his remarks, Prof Lane said the “appropriate development” of the European financial system was “critically important” for the prosperity and stability of the European and global economies and will have a “broad impact” on the wellbeing of all European citizens.

“Of course, there are many two-way interactions between the structure of the financial system and the policies of central banks and financial regulators,” he said. “In one direction, the regulatory and monetary environment influences the behaviour of financial institutions and financial markets.

“In the other direction, the effectiveness of the instruments available to policy officials in maintaining financial stability and protecting consumers depends on the structure and composition of the financial system.”

He said the European financial system currently faces “myriad cyclical and structural challenges”.

“Some relate to global forces, such as demographic trends, the growing share of emerging economies in the international distribution of output and wealth and the thirst for so-called safe assets such as high-quality sovereign bonds,” he said.

At a European level, he said the “legacy effects” of the financial crisis and the European sovereign debt crisis mean “many sectors are focused on the repair of over-leveraged balance sheets, while there is an open debate about the likely duration of the current environment in which both policy rates and long-term interest rates are at historically low levels”.

“At the same time, financial institutions must adjust to the new post-crisis regulatory environment, which requires shifts in conduct in addition to a more restrictive approach to balance sheet management.”

If a financial institution is “too far gone”, he said an “orderly resolution plan” is required to limit contagion effects and avoid a publicly-funded bailout intervention.

He added it was “also clear that Europe is overly dependent on the banking sector, such that the policy regime should support a greater role for non-bank providers of debt and equity financing”.

Opening the forum, Taoiseach Enda Kenny said the event would “build on Ireland’s reputation” in international financial services by allowing senior executives from the international financial services market hear about “why Ireland is a great place to locate their business”.

IDA Ireland chief executive Martin Shanahan said the forum was "an opportunity to raise the profile of the sector further" and provide a platform for "leading industry players to discuss how they see the industry evolving over future years".

Speakers at the forum also included Colm Kelleher (president, Morgan Stanley), Timothy O'Hara (chief executive Global Markets, Credit Suisse), and Doug Dachille (chief investment officer, AIG).