In her first interview since taking on the supervision of the banks, Fiona Muldoon talks about what motivates her in her role at the Central Bank
A PROBING question from her son about her generation’s role in the financial crisis led to some soul-searching by Fiona Muldoon and a decision not to sit around complaining about what went wrong but to do something about it.
Shortly after returning to Ireland – following years of working abroad – she packed in a lucrative career in the financial services sector last year for a job regulating it.
Muldoon took up the new role of director of insurance supervision at the Central Bank in August 2011 and the scope of her job widened in March when she took responsibility for supervising the banks as well. She reports to the deputy governor in charge of regulation, Matthew Elderfield.
“I joined because I wanted to be doing something other than sitting on the sidelines griping about the fact that we got it wrong,” she says in her first interview since taking on the supervision of the banks.
After returning to Ireland, her son was watching the bad news about the economy and noticing how people were in a bad mood. One day he asked his mother: “Aren’t you the generation that ruined the country?”
Muldoon says she can see a generation of bright kids coming up and wants to be involved in correcting the regulatory failures in the industry that she had chosen for her career. “A large part of coming home was about the family and a large part of my motivation in being here is about trying to fix it.”
Muldoon now has 167 staff reporting to her on banking and credit union supervision and about 95 on insurance regulation.
Speaking in the Central Bank’s offices behind the National Convention Centre in the Dublin docklands, Muldoon has a good view of the skeletal building, the one-time proposed new head office for Anglo Irish Bank, that will be the Central Bank’s new offices following its €7 million acquisition from the National Asset Management Agency.
It is a reminder of the devastation caused by the banking crisis. One part of the financial repair job that is taking up much of Muldoon’s attention is challenging the banks on whether they are reacting sufficiently to the mortgage crisis.
She has met the board of AIB to impress upon it the importance of making sure staff deal with problem mortgages – devising new products to resolve them or taking appropriate enforcement action to address the bad debts on their books.
The banks have been directed to “segment” their mortgage books into categories – loans that can be repaid with forbearance (such as interest-only for a period) and loans that will never be repaid. In the latter category, they will need to modify certain loans with new products and foreclose on others.
The sharp increase in arrears has brought matters to a head.
The number of home loans in arrears of 90 days or more soared to 77,630 at the end of March – or one in 10 mortgages, compared with 49,609 in March 2011.
The value of mortgages that are in arrears or have been restructured to help the borrower repay them rose to €21.7 billion or 19.3 per cent of owner-occupier mortgage debt, up from €15.8 billion or 13.6 per cent a year earlier.
Plans to solve this crisis fall under the mortgage arrears resolution strategies or MARS that the Central Bank has demanded of the banks ahead of the introduction of the new personal insolvency regime which will create formal out-of-court systems to write down unsustainable mortgage debt.
“The scale of the mortgage arrears problem has been of a greater order than maybe the banks expected and they haven’t got enough scale to be able to deal with that,” she says.
This is why Muldoon and Elderfield are raising questions with the banks and challenging them directly – do they have the staff to tackle the problem, do they have the right systems in place, are they reporting progress to their boards and is it being properly managed?
“I would say the banks are not ready. They would say that they were doing other things, that there were a lot of other fires to be put out. There is an element of truth in all of that.
“However, depending on when you start the clock – three or four years into the current situation – it is becoming more and more pressing for them to be ready.”
Privately, the banks complain that the Central Bank’s code of conduct to protect customers in arrears may have stymied efforts to collect on loans and to take more effective action to tackle the problem, as it limited the contact banks could have with borrowers.
“There is a little bit of me that says, somewhat facetiously, ‘They would say that, wouldn’t they?’ There is also a space where I think they have a legitimate concern.
“If I am coming at this from a prudential perspective, I would see it that the banks want what we would want – which is that they need to deal with the issues on their balance sheets and that we are in a clean-up phase – and they need to work through that.”
The Central Bank has since clarified the code following consultation with the banks to address some of their concerns.
Many reasons have been presented for the rise in mortgage arrears last year after the rate stopped tracking unemployment levels, the previous guide for estimating mortgages arrears trends.
The banking industry says the code may have played a part in the increase; others say the debate around debt forgiveness and upcoming changes to the personal insolvency laws encouraged strategic default by borrowers hoping for better deals.
Muldoon doesn’t think there will be evidence to show the real reason for last year’s increase.
Without better systems in the banks to understand how much mortgage debt is affordable, it is “almost impossible” to separate anecdotal from real evidence.
“There are a lot of people with opinions and very little hard evidence of strategic defaults.”
So without the evidence, can the Central Bank say the €64 billion injected into the banks is sufficient to cover the mortgage losses on their books?
Consultants Blackrock assumed a worst-possible outcome of €16 billion in lifetime losses on mortgages in the stress tests of the banks last year based on “a kind of repossess-and-liquidate model”, Muldoon says.
Losses on loans have moved away from the expected levels towards the stress levels set in the tests and the banks have been adequately recapitalised to cover this, but a variety of factors could yet change the picture, she says.
If there are widespread defaults, further property price falls or if the “cure rate” in arrears does not improve, it could have an effect.
So too could a contagion “based on certain people being treated in one way and everyone else wanting to have a piece of that”.
“It would certainly be foolish to sit here today and say that there is absolutely no way that no new further capital will be required. There is still a lot to work through.”
Muldoon acknowledges the “high stakes” of what is at play here and that the roll-out of new mortgage products later this year, as well as the introduction of the personal insolvency legislation, has to be “careful and measured”.
This is “unchartered territory”, she says, and mortgage debt write-offs in new out-of-court Personal Insolvency Arrangements must strike a balance between being fair to struggling borrowers on one side and, on the other, not being seen to be “frittering away” capital injected into the banks.
Muldoon says there needs to be better “dialogue” about the effect of “so-called debt forgiveness” on the banks and the additional costs it would create for the State.
There has to be a better understanding of how important it is to have a “managed and fair system for those who need help and to stop any sense that there is a free-for-all or piggy-backing on that for those who don’t”, she says.
“That is a very difficult thing – our inter-connectedness with the banks and how expensive it could be for us as a society if we get that wrong. “I don’t know if we have had enough dialogue about what it is going to mean for those who do get the debt forgiveness.
“ That it is not going to involve some sort of easy option. It is not just a free ride. I don’t know that we have properly had that [dialogue] as a nation.”
AS A REGULATOR of insurers and banks, both domestic and foreign, Muldoon must be heavy- handed in pushing for repairs still required at the Irish banks, while setting a fair and proportionate level of regulation for international financial companies doing business here.
Does she feel that the pendulum may have swung too far towards over-regulation?
“I come from a North American public company environment and I was dealing with Swiss regulators, the UK, the Bermudians, the New York insurance department,” Muldoon says.
“I can tell you categorically that a lot of what feels like over-regulation in Ireland is just catch-up.”
She adds that the insurance industry has fared better than banking but she is still concerned that the excess capital in the industry and the depressed pricing is putting pressure on insurers to increase returns for investors.
She warns that insurers have much more to do to be ready for the EU Solvency II directive, which governs how much capital they must hold in reserve, when it comes into force in 2014.
“They are in a healthier space than the banks, but that doesn’t mean that you don’t have to be vigilant and it doesn’t mean that you can be sanguine about some of the pricing behaviour that we see in the marketplace internationally. It is a very difficult point in the cycle,” Muldoon says.
Part of rebuilding Ireland’s reputation internationally, she adds, involves rebuilding the State’s regulatory reputation, which was badly tarnished by the crisis. The best companies understand the need for regulation.
“Time and time again, down through history, financial services firms need regulation because they are systemic to wider societal needs and that is why they are regulated.
“They also have shown time and time again that they need that regulation, that they are not fit to be out without adult supervision.”
Muldoon says she learned “an awful lot” from the near failure of XL Group, her employer for 17 years, in the 2008 financial crash.
The insurer got sucked into a mini-AIG strategy by investor demands for higher returns and, in the years before the crash, started offering AAA-rated “wraps” on investment packages of US residential mortgages that turned sour in the subprime crisis.
XL avoided a public bailout by raising almost $3 billion from investors to fund a settlement virtually wiping out a $66 billion exposure to these toxic policies.
“The lessons learned at XL were learned the hard way and I feel I bring that experience to the table and how much you learn when you get things wrong and how much it takes to correct them.”
As a public company executive paid in shares at that time, Muldoon says the experiences of seeing personal wealth destroyed has fundamentally changed her.
“They change your relationship both with the institution you are working for and, in many ways, change your relationship to money and how I thought about success in some ways as well.”
Recalling her time as an accountant in the early days of the IFSC in Dublin in the 1990s, Muldoon says this was the start of an Irish economic miracle.
“I suppose I, like many, would feel that in the Noughties, we blew that and got it very badly wrong.”
One reason she decided to join the Central Bank – aside from the prompting of her son’s question – was to bring a commercial reality to the regulator, so that those skills would be matched “on both sides”.
This is important to knowing how to identify problems, how to stop the next crisis and how to clean up after this one, she says.
“Ireland needs to grow up in that space – [on] the notion of citizenship and the notion of what we need to do,” she says.
“We need to better understand that getting one over on the other fellow is getting one over on you and me and everybody else.”
Friday interview
Name:Fiona Muldoon.
Position: Director of credit institutions and insurance supervision at the Central Bank.
Age: 44.
Family: Married with two children, Brian (14) and Meadhbh (10).
Hobbies: Gardening and running.
Education: BA in philosophy and English from University College Dublin and a fellow of the Institute of Chartered Accountants in Ireland.
Career: After training as an accountant at Touche Ross, she took up a job at Chase Bank in the then fledgling International Financial Services Centre in Dublin.
She then worked for 17 years in financial and general management roles at the insurer XL Group in Dublin, London and Bermuda.
When she left the company in 2010, she was group treasurer in charge of capital management, rating agencies, foreign exchange and liquidity management.
Returning to Ireland, she worked briefly as chief financial officer of Canada Life Ireland before joining the Central Bank in August 2011 in the new role of director of insurance supervision.
On Jonathan McMahon’s departure from the Central Bank in March, she took over supervision of financial institutions in addition to her existing job of monitoring more than 300 insurance and reinsurance firms at the regulator.
She reports directly to the Central Bank deputy governor Matthew Elderfield, who is in charge of financial regulation.
