ANALYSIS: Restoring the Central Bank's primacy in bank oversight acknowledges past failures
THE LOOMING restoration of the Central Bank’s primacy in bank oversight stands as an explicit acknowledgement by the Government that its revamp of the regulatory system almost a decade ago was an unmitigated failure.
Given rampant turmoil in the banking sector, which may yet lead to the part nationalisation of the entire banking system, the plan set out by Minister for Finance Brian Lenihan in his Budget speech will take responsibility for bank regulation out of the ambit of the discredited Financial Regulator.
Following the upheavals at Anglo Irish Bank and loss of international and domestic confidence in Irish banks generally, the Minister’s aim is to restore the credibility of the regulatory system. That this will be an uphill task is obvious. That the current system is a creature of his own Government, whose policies relentlessly promoted the upsurge in property lending, is an indictment of its own record.
Although much of the most crucial details remains unclear, the Central Bank will be placed “at the centre of financial supervision and financial stability oversight” in the new system.
The Department of Finance declined yesterday to provide a schematic diagram on how the new system will operate in practice on the basis that it would not be appropriate “at this time”.
However, Lenihan himself has said that the new structure will provide for the full integration and co-ordination of the prudential supervision and stability of individual financial institutions with that of the wider financial system.
Whatever its ultimate design, the oblique structure put in place in the fudge that resolved a long dispute around the turn of the century between the then finance minister Charlie McCreevy and then tánaiste Mary Harney will be replaced.McCreevy favoured the Central Bank’s primacy; Harney wanted the creation of an independent financial regulator.
The design they ultimately agreed on separated the functions of the Financial Regulator, which has a consumer protection remit in addition to its banking supervision duties, from the functions of the Central Bank, which is responsible for monetary policy, financial stability, economic analysis and currency and payment systems.
Importantly, however, both work under the one umbrella of the Central Bank and Financial Services Authority of Ireland.
Extraordinarily, significant overlaps between the boards in charge of each body did not prevent them from adopting essentially separate public stances in relation to the huge increase in dangerous property lending as the property bubble inflated.
While the Central Bank voiced frequent warnings about the bubble – dangers that have come home to roost with wrenching consequences for many families in the State – the Financial Regulator did not act and the Central Bank did not force it into action. While the regulator’s most public activities were in consumer protection, consumers are now on the hook for the liabilities of the entire system.
At a macro level, the Central Bank was worried and said so in its public reports and in private advice to the Government. The Government didn’t intervene, however. At the micro level of individual institutions, the regulator seemed assured that a very malign situation from which there would be no easy retreat was not evolving. How wrong they all were.
The problem for the Central Bank and the regulator is the overlap of their two boards, which should have prevented the two bodies from taking what were opposing stances in relation to bank lending. Given the Central Bank’s overarching responsibility for the stability of the wider financial system, its attempts to absolve itself from responsibility in the debacle have no credibility.
As the go-go Irish economy boomed – amid abundant self-congratulation in the Government and the banking community – common sense concerns expressed by the Central Bank were set aside on the altar of the regulator’s “principles-based” approach. The Central Bank, whose supremacy is now set to be restored, didn’t stop the rot. The regulator welcomed the plan.
“Both the board of the Central Bank and the authority of the Financial Regulator, in a joint submission to Government, recognised that the architecture of financial regulation and supervision, both here and internationally, required broad-ranging review.” Quite.
IFSRA and Central Bank overlap
Irish Financial Services Regulatory Authority board
Jim Farrell (Chairman)*
Alan Ashe
Gerard Danaher*
John Dunne*
Alan Gray*
Tony Grimes*
Mary O’Dea*
Deirdre Purcell*
Dermot Quigley
*overlapping board members
Directors of the Central Bank Financial Services Authority of Ireland
John Hurley (Governor)
Tony Grimes (Director General)*
David Begg
John Dunne*
Dr Brian Hillery
Dermot O’Brien
Brian Halpin (secretary)
Gerard Danaher*
Jim Farrell*
Mary O’Dea*
David Doyle
Alan Gray*
Deirdre Purcell*
