IN IDENTIFYING more rigorous financial regulation as one of the steps to restoring Ireland’s international image – and to economic renewal – Minister for Finance Brian Lenihan has pledged that the role of the Central Bank will be reformed to place it at the centre of financial supervision and financial stability oversight.
It is an embarrassing reversal of policy by the Government and tacit admission of the failure of its own experiment in financial supervision. For the existing regulatory system reflects a compromise reached between two government ministers nearly a decade ago: Charlie McCreevy favoured primacy for the Central Bank in financial regulation; Mary Harney disagreed and sought to champion consumers via an independent financial regulator. Settlement of this political turf war involved a division of responsibilities and a heavy helping of fudge. The Central Bank has oversight of monetary policy, financial stability and allied matters and the Financial Regulator supervises bank regulation and consumer protection as an independent entity but within the Central Bank’s legal authority.
As long ago as 2002, the Government was describing the new regulatory regime as demonstrating nationally and internationally its commitment to ensuring that Ireland had the highest standard of financial regulation and consumer protection. The aspiration, however, never matched the achievement. Standards of financial regulation fell and criticisms of the Irish financial sector – including aspects of the Financial Services Centre in Dublin – which might have seemed unfair and unjustified have proved prescient and accurate. Anglo Irish Bank misled shareholders about outstanding loans to its chairman and deceived the public about the bank’s real state of financial health. Throughout this, the Financial Regulator failed to act.
Light-touch or principles-based regulation became hands-off regulation. For this approach, Ireland Inc has paid a heavy price – a loss of reputation and more expensive credit. When Standard Poor’s, the credit ratings agency, downgraded the Irish banking system for the second time in four months, it cited as justification the “reputational fallout from the events at Anglo Irish Bank” and “weakened investor confidence in the framework of bank regulation”.
As the property bubble inflated, Central Bank governor John Hurley periodically highlighted the risks to financial stability and advised the Government accordingly. However, the Financial Regulator perhaps reassured by the banks’ ever optimistic and invariably inaccurate risk analysis of their loan books, seemed less concerned. The Central Bank failed to sound the alarm loud enough to warn of a gathering storm in the property market and the regulator, as financial watchdog, rarely barked and almost never bit.
The Government has much to learn, not least from its own major contribution to this national debacle, as it designs a new financial architecture to repair a damaged national reputation and to restore the credibility of a discredited regulatory system.