Banks are the central nervous system of an economy. They provide core functions – particularly the transmission of payments. They provide deposit-taking, credit and risk-mitigation services without which the household, corporate and government sectors simply could not function. They are also a link to Ireland’s international trade network. The health of an economy rests, in large part, on the quality governance and effectiveness of its banking system. Where trust is compromised, the stability of the entire system comes under strain.

This central nervous system went into spasm as a direct consequence of the banking crisis, its governance and regulation – and the health of the country has as a result been compromised on a scale that could hardly have been conceived.

All of this provides the rationale for licensing, regulation and supervision of banks. Industry and markets have proved wholly incapable of contributing to the integrity and functioning of the market. The public has neither the information nor the capacity to make informed decisions, especially at a time of crisis. They are, quite simply, at the mercy of the boards of banks and institutions – and on the robustness of the regulatory systems and calibre of leaderships by which they are directed.

The particular insight of Mr Justice Martin Nolan in his statement of judgment on the Anglo Irish directors was to put a name on the failure at the level of both the board and in terms of the regulatory system by which boards are ultimately supervised and held accountable.

The banking inquiry may bring political closure to this catastrophic period in our history – that is why, after all, such inquiries are beloved of the political establishment. The inquiry is, however, unlikely to add much to the narrative that is now ingrained in our national psyche. There have already been three (published) reports, analyses by international agencies, as well as the outcome of the recent Anglo trial (not forgetting the infamous Anglo recordings).

What is important is the European dimension to all of this and, also, a forward-looking perspective on the part of the inquiry team.

Mr Trichet, former governor of the ECB, and the European Commission should be “invited” to provide their perspective on the context within which regulatory failure occurred. This won’t happen – but it should, because of the interconnectedness between the implosion in Ireland and what was happening contemporaneously across the euro zone.

Out of their depth
Hindsight is opaque to lived realities. The entire western financial system – the "authorities" and the markets – were wholly out of their depth. Equally, the crisis with which they were grappling, a crisis rooted in corporate capitalism and one that, on the basis of published data, was predicted by Morgan Kelly.

But when it came, triggered by external events, the regulatory system foundered. Bear in mind, however, that the Central Bank had some years previously been split into two parts: one with central banking capabilities and a new financial regulator.

That was a crucial mistake – a point I and others made – and it was a political mistake. It was exacerbated by the adaption of a “principle-based approach” which focused on “light-touch” oversight.

The financial regulator as an entity lacked the capacity to direct a self-willed banking system through what was wrong and what was right– and what might, given the circumstances of an unprecedented crisis, be explicitly deemed necessary in the national interest. There was no “lighthouse beam” providing leadership and clarity from the centre. Mr Justice Nolan incisively picked up on this – and its implications.

However, it is primarily to the future that the banking inquiry should direct its intentions. There are dimensions to this forward-looking approach. Regulation is important. But it’s not at all clear that the expediently growing volume of financial legislation – that few actually read and that is processed, rather than scrutinised, by the Dáil – is the answer. Governance and ethics are more important because without them regulation won’t work anyway.

Malcolm S Salter, in a masterly and wise analysis of the collapse of Enron noted: “It is too simple to conclude that the appropriate remedy for Enron’s mistakes and ultimate collapse lies with more regulation of corporate affairs . . . whatever its eventual impact on board behaviour, we need not – and cannot – rely on legislators to prevent the kinds of problems that destroyed Enron.

“Solutions to those problems lie not in drafting new laws, but rather in the far more complex task of creating, in company after company, organisational processes and structures that promote effective management and ethical behaviour.”

The Central Bank, as its recently published Performance Review 2013, demonstrates, has done a great deal of work to strengthen its oversight, both in terms of analytics and also interventions. It now functions within much stronger regulatory capabilities within the euro zone – at the heart of which is a greatly increased mandate for the ECB – as well as globally.

Digital shock
In any event, the next crisis is more likely to originate from a "shock" within the digital universe within which banks and financial markets now operate. That's a very different story, but one to which the inquiry should direct itself.

More immediately, what is imperative is that the inquiry focuses on whether or not Ireland now has a banking system that is fit-for-purpose. It doesn’t. The troika left an emasculated duopoly serving an emaciated economy. There is clearly a need for new entrants, including social banking of the kind evident in other countries.

It never made sense that a system that so evidently failed Irish households and business and companies should be simply rebuilt, albeit with greater regulation. The corporatist mindset – driven primarily by global investors rather than the imperatives of supporting homes and businesses – still stalks part of the system. The lesson that banks are there to serve the community from whom they get their legitimacy still has not been learned.

The mortgage resolution process is not working as it should – and for this the Central Bank bears some responsibility. A “public good” perspective is more necessary than ever. The market structure, the conduct of participants and the performance of banks benchmarked against the needs of the Irish economy provide a template for the inquiry.

Prof Ray Kinsella is on the faculty of the International Academy of Retail Banking