Ireland's reputation abroad could be damaged if regulation is removed from the Central Bank, one of country's top financial experts has warned.

In a new report, Prof Robert Hutchinson, professor of business finance at the University of Ulster at Coleraine, has warned that "the good repute of Ireland as a location for foreign financial companies could be put at risk, if the regulatory function is removed from the Central Bank of Ireland".

Prof Hutchinson, who wrote the section on financial services in the ESRI's 1996 study on the impact of monetary union, is one of top academic experts on the financial system.

The report, The Financial Services Industry in Ireland : Challenges and Opportunities in the New Millennium, also warns that major changes are afoot because of the single currency. But according to Prof Hutchinson transparent regulation will become of increasing importance in Europe and it would "seem inappropriate to diminish the Central Bank of Ireland's role".

According to Prof Hutchinson some recent concerns about the industry have been overemphasised. "This overemphasis could result in an unnecessary weakening of locally-headquartered companies, in international terms. Furthermore, the good repute of Ireland as a location for foreign financial companies could be put at risk, if the regulatory function is removed from the Central Bank of Ireland," he warned.

He added that prudential regulation underpins stability in any financial system and the Central Bank's performance has been well above average.

"The role and position of the Central Bank and the maintenance of a low level of systemic risk within the system is an important intangible asset in attracting foreign multinationals to Ireland."

In the report, commissioned by the Irish Bankers Federation and the Financial Services Industry Association, Prof Hutchinson also concludes that there will be increasing integration and much more intense competition. However, he said a hostile take-over of an Irish institution remains unlikely. No direct foreign penetration of the domestic market is anticipated .

He also points out that, with lower interest rates, the absolute costs of finance are falling, while the Irish banks' deposit base will experience upward pressure on deposit rates with the implication that net interest margins will be squeezed. "There is a possibility that retaining the deposit base could become acute," he said.

The report also makes several recommendations including the need for continued support of the IFSC and a review of the legal framework to make sure the industry is not disadvantaged.

In addition, international transport and telecommunication links and the internal transport infrastructure need to be addressed urgently.

He also recommends that the Irish Stock Exchange should again review the case for establishing a local corporate bond market, and stamp duty in relation to trading Irish stock should be abolished. "This would enhance the Exchange's ability to compete with other exchanges and would alleviate some of the problems anticipated in the area of small business financing," he said.