ECONOMICS:This week the Central Bank/Financial Regulator yet again expressed its displeasure at the pace with which the banks are restructuring their non-performing loans (NPLs). I am getting very tired of hearing those who are charged with regulating the banks trumpeting their own impotence.

Two weeks ago the Central Bank governor Patrick Honohan, at whose desk the buck for sorting out the banks ultimately stops, gave evidence to a Joint Oireachtas Committee. Before analysing what he had to say on dealing with the NPL problem, a few words about the governor are in order.

Honohan is an internationally recognised expert on the economics of finance and has spent a good portion of his career dealing with banking crises across the world. It would have been hard to find anyone better qualified to take on the job of reforming the Central Bank.

Second, his staffing of the top layer of the institution – with a blend of insiders and outsiders, natives and non-natives, youth and experience – could not have been better. Finally, he has amply demonstrated his independence from Government in a manner none of his predecessors would ever have contemplated.

Cometh the hour . . .

Like many others, I applauded his appointment and wanted nothing more than for him to succeed. But there are reasons to be concerned that the organisation he leads has not done nearly enough to make the banks deal with their NPLs – the very reason they were given vast amounts of capital by taxpayers.

Asked why the banks are not working much faster to restructure NPLs, Honohan told the Oireachtas committee on January 16th, “They are hesitating because they are not sure which way to jump as they do not yet have a good way of sorting the debtors that need a fundamental and permanent restructuring from those that can be brought back on track.” He added, “We are trying to ensure that the banks have the in-house capacity and the policies to deliver solutions.”

The banking business is about issuing loans and managing them once issued. The banks tell the regulator that because they focused so much on issuing loans during the bubble, and that because so many loans have gone bad, they now have neither the capacity not the skills to deal with all the problem loans.

This is rubbish. Property prices started falling more than five years ago. There is no excuse for any commercial organisation taking half a decade to adapt to a new market environment. If it is true that, after five years, bankers have still not refocused their energies from issuing lots of loans to dealing with lots of non-performing loans, it amounts to yet another gross failure of management.

Honohan and his team need to put in place their own targets and mechanisms to ensure managers who fail to do what is required of them or face consequences, up to and including being fired.

On that matter, Honohan had this to say, “We are working on targets but I do not want there to be too much reliance on targets for the banks to meet because they will meet the targets, but if the target is a simple one, they will meet it in a way that does not deliver the goods”.

How many years does the governor need to design a system of targets that will deliver the goods?

Too nice for his own good?

Underpinning all of this is concern that there is still too much gentlemanliness and not enough ruthlessness being shown by the regulator towards bankers. Honohan’s choice of words on January 16th are worth scrutiny.

“It is a step-by-step process whereby we ask the banks to convince us they are doing enough . . .” and “We think the banks should still be doing the engagement with the customers . . .”.

It would be wrong to focus too much on the words I have emphasised (the governor is a very polite man), but there is reason to believe that such soft words are too often reflected in soft actions.

Excessive politeness is one thing. Naïveté is another. Honohan, who has been governor since 2009, told lawmakers, “Until 15 months ago I would have stated we expected the banks to step up to the plate on their own”.

Given the behaviour of Irish banks over a half-decade of crisis and the incentives banks in their position face (which are heavily skewed towards kicking the can), it is perplexing that he maintained so much faith in the banks for so long in the face of such overwhelming evidence of deliberate foot-dragging and incompetence.

It is long past time that Honohan and his regulators stop complaining about the banks and start exercising all lawful powers they have to make them do what is in the interests of the economy and society.