Former regulator chairman will ‘forever regret’ shortcomings

Former chairman of the Irish Financial Services Regulatory Authority Brian Patterson has told the banking inquiry he will "forever regret" the Financial Regulator's shortcomings and failure to see warning signals prior to the economic crash.

The complex structure of the Financial Regulator combined with too much emphasis on consumer protection, constrained powers and constrained resources limited its effectiveness in supervising Irish banks

“As constituted, the Financial Regulator had an overly complex structure with an extremely broad mandate, which emphasised consumer protection as the main priority, with constrained powers and limited resources devoted to banking supervision,” he said.

He said the "complex entanglement" with the Central Bank also limited the regulator's effectiveness in a number of ways. However, he said shortcomings in the structure do not alone explain why the system failed.

He said the regulator’s processes and reports and the findings of external scrutineers all failed to send warning signals. “As a result, the authority simply did not see the enormity of the risks being taken by the banks themselves and the calamity that was to overwhelm them,” he said.

“Had we known then what we know now, we would, of course, have acted more strongly and used whatever powers were at our disposal with the forcefulness required to rein in the banks’ lending.

“But we did not know then what we know now. And so, as a key part of the defence against banking failure, the Financial Regulator failed in its responsibility to uphold the safety and soundness of the Irish banks,” he said.

Line of defence

Mr Patterson said the first line of defence against a bank’s failure and the responsibility for protecting its safety and soundness lay squarely with the bank itself - its board, management, risk committee and compliance officer.

The second line of defence was the bank’s auditors. The third was the Financial Regulator, responsible for the prudential regulation of individual financial institutions, including banks and the fourth was the Central Bank, which retained responsibility for systemic financial stability.

"In the banking crisis which befell Ireland, all of these defences failed for complex and inter-related reasons," he said.

“As chairman of the authority I accept responsibility for my part in that failure. It is something I regret deeply. Had I known then what I know now, things could have been very different.”

Mr Patterson said the priority given to consumer protection was exacerbated in the early years by a number of high-profile consumer issues, such as foreign exchange overcharging, which absorbed much time and energy of both the executive and the authority.

“Many of the interactions with senior bankers on these issues were extremely robust - during one heated discussion, in my presence, the CEO of a large bank threw a bunch of keys across the table to our CEO and asked him if he wanted to run the (expletive) bank,” Mr Patterson said.

Mr Patterson said the regulator was operating a system of principles-based regulation, which was internationally accepted as best practice at the time.

“It was also embedded in the Basel II accord, a regulatory system to which the Irish government was committed - and which called for dramatic increases in data gathering from the banks,” he said.

‘Cataclysmic events’

He said implementing Basel II challenged the Central Bank’s IT capability and diverted banking supervision staff from normal duties.

“None of the many internal processes or external reports that I have described raised serious red flags about the banks’ viability or pointed to any of the cataclysmic events that were to follow.

“Had any of them shown a risk to a bank’s solvency - let alone to the banking system as a whole - the alarm bells would have been ringing loudly and the authority would have been impelled to investigate and to take action.”

Mr Patterson said the regulator’s relationship with the Central Bank was “professional” but there were some resourcing issues and it was constrained by the bank’s HR policies, systems and culture.

“Accommodation and the critically important services of HR and IT systems were provided by the Central Bank. The bank was not a strong performer in either area and this did slow down our banking regulators in coping with change - of which there was a lot in the period - and in developing their crucial data analytics capacity,” he said.

Mr Patterson was chairman of the Financial Regulator from April 2002 to April 2008.