CONCLUSIONS:IRELAND'S BANKING crisis was "home made" and our system of regulation was not sufficiently "hands on or pre-emptive", the preliminary report produced by Klaus Regling and Max Watson has found.
The 45-page report is heavily critical of the structure of regulation in this country and its lack of intervention with and supervision of the banks as the economy overheated.
The authors also concluded that there now needs to be a more “confrontational culture in the inter-agency discussions that explore risks during fiscal and supervisory policy design”.
And they said “serious breaches” of corporate governance, which went beyond “poor risk assessment”, need to be addressed “squarely” by the Government and regulators.
Mr Watson and Mr Regling identified four weaknesses in the supervision of our banks.
They said the supervisory culture was “insufficiently intrusive” and “forceful” and staff resources were “seriously inadequate for the more hands-on approach” that was needed.
“On-site inspections were infrequent,” the report says.
“Targeted follow-up was weak, including crucially on governance issues. Supervisors were perceived as reluctant to impose severe penalties, and during the key period when major governance problems arose, they imposed no penalties on banks at all.”
The authors said there was a “serious lack of skills” and numbers of people at the Financial Regulator.
The Watson/Regling report also found that the regulator underestimated the funding risks attached to the banks’ overexposure to commercial property.
“The fact is that supervisors, right to the end, clung on to the hope of a soft landing for the economy and the property market,” they stated.
The report also found that key facts on banking governance were not available to the Government at the time when the banking crisis began to unfold.
They highlighted how failures in bank governance were not tackled with sufficient steel by the regulators.
They also called for the establishment of a credit register to highlight the exposures of large borrowers across the financial system and their concentrations in individual institutions.
“Changes are needed to ensure that such issues are properly identified and monitored in the future,” the report states.
The report also highlights how Irish building societies were allowed to expand into commercial property as opposed to residential mortgages, which was “followed by a significant rise in the riskiness of some balance sheets”.
This refers to Irish Nationwide and EBS.
The two experts said such a regulatory change should have provoked an intensification in the supervision of the societies to ensure that their management teams had the “skills and judgment to avoid over-rapid expansion” into this new business area.
“There was an extended dialogue about some governance issues; but overall the response was far too weak,” the authors concluded.
They also laid some blame for the banking crisis at the door of the Central Bank, which they say “had a near monopoly on economic expertise in the two-headed regulatory institution”.
They concluded that supervision needs to be based on a deeper analysis of the links between risks in different types of assets and liabilities.
“It needs to capture liquidity as well as solvency risks, and it must explore in a more contrarian way various macrofinancial scenarios for the economy, including economic correlations among assets, and between assets and liabilities,” the report found.
