The appearance of a number of witnesses from the Central Bank and the financial regulator at the Banking Inquiry in recent days has only served to confirm the shortcoming of the entire regulatory system in the period leading up to the crash. Remarkably, the whole system missed the massive exposure building up in the system – and the resulting risk. Any measures taken, such as a late move to increase the capital which banks had to hold, were too little, too late.
Both former Central Bank governor John Hurley and Patrick Neary, then chief executive of the financial regulator, accepted the obvious – that there were massive failures in regulation. Anyone listening to their evidence will nonetheless have been frustrated that all the official players in the system believe that somebody else should carry much of the blame.
Mr Hurley pointed out that overseeing particular institutions was the responsibility of the Financial Regulator. Mr Neary said that he relied on economic forecasts from the Central Bank and the Department of Finance and, had these been correct, there would have been no crash.
The central cause of the failure was not, however, that the Central Bank and the financial regulator had been split into two separate bodies and that this in itself caused some big information deficit. The structure may not have been ideal, but the problem was that neither was doing its job. The bank should have spotted the huge systemic risk and shouted about it. The regulator should have realised the banks’ huge exposures and should have been on top of issues such as Seán Quinn’s disastrous investment in Anglo Irish Bank.
Instead, driven by some nonsense known as “principles-based regulation”, the regulatory system gave the banks far too much leeway, both in terms of general lending and of specific governance issues at Anglo and Irish Nationwide. It should be said that the tone for this was set by the government, which championed a policy of light-touch regulation. However, the regulatory system did not do its job, either, and those at the top of a system which fails must accept responsibility.