ANALYSIS:While urging closer co-operation, the report lacks a way of bridging national boundaries, writes SIMON CARSWELL

FINANCIAL REGULATORS have taken the brunt of the blame for the global banking crisis, for allowing the trading of highly complex financial products to go unsupervised, and for not keeping in check exuberant bankers seeking heady profits and bonuses.

The independent report by former managing director of the International Monetary Fund Jacques de Larosière recommends a major overhaul of the EU’s existing structure for regulating the European banking system. However, it stops short of proposing a pan-EU regulator.

Again, greater co-ordination and co-operation between regulators is called for, while the report recommends that a new centralised risk council be set up to monitor risks to the European financial system. The risk committee would be chaired by the European Central Bank and include central bank governors and supervisors from the banking and insurance sectors. The committee would sound the alarm where risks exist, to be followed up by national regulators.

However, beyond calling for greater co-operation, the report fails to show how the cracks can be filled between banking regulators across national boundaries. Problems arose for the German banks in the lack of supervision of off-balance-sheet investment vehicles based in Dublin. These entities amassed large losses without raising warning signs at either the Irish or German regulatory authorities.

The real difficulties on reforming regulation lie at national level. The task facing Minister for Finance Brian Lenihan is to create a new regulatory system that no longer relies on the “light-touch” or principles-based approach, which depends heavily on bankers abiding by codes of conduct.

Lenihan has said regulatory systems across the world have been “questioned for their failings and shortcomings, most of which stems from a culture of what is called light-touch regulation”.

He said that, since various revelations within the banks, there is “heavy-hand regulation now”. He has been quick to resist calls from the Opposition to dismiss the board of the regulator.

Lenihan said on Tuesday that proposals for a new regulatory system would be “finalised in the next few days”. They are then expected to be brought to Cabinet before more legislative work is carried out in the coming weeks.

Consultancy firm Mazars has been reviewing the regulator’s operations in recent months.

As part of a move away from light-touch regulation, the regulator is likely to be merged with the Central Bank and there will be more intensive contact between that entity and the Department of Finance.

Much of the criticism of the regulator’s failings has arisen from the disjointed nature of regulation. A more unified approach to supervision is expected, with possibly greater powers for the Central Bank.

The expansion of the Irish financial services industry into a sector of more than 13,000 mostly internationally owned entities has left the regulator – with its staff of 355 and annual budget of €55 million – struggling to keep up.

The de Larosière report sets out a framework to improve banking regulation at an EU level, which will guide Ireland’s policing of international banks.

But the main challenge lies in strengthening banking supervision at home to restore confidence in the regulator and eliminate risks within the banks before they emerge.