Finance Correspondent
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The new single supervisory mechanism for supervising banks in the euro zone will "introduce a healthy distance" between the drive at national level for economic growth and the "inherent risk" of over-heating those same economies, Fiona Muldoon, the head of banking and insurance regulation at the Central Bank, told a seminar in the University of Limerick yesterday.

Ms Muldoon said this can be achieved by the mechanism availing of its future powers to use macro-economic instruments – industry-wide rules governing, for example, the imposition of loan-to-value ratios and loan-to-income ratios.

Part of framework
As part of the mechanism framework, the European Central Bank will directly supervise all "significant" banks in participating member states. This will be a minimum of three banks per country.

In Ireland's case, it is likely to be AIB, Bank of Ireland, and either Ulster Bank or Permanent TSB.

Ms Muldoon said the single supervisory mechanism would most likely become operational in the fourth quarter of 2014 and would operate in parallel with the European Banking Authority, which would act as policy maker or regulator for the entire European Union.

She said that the involvement of outsiders in directly regulating Irish banks would require a change in culture here. "This can only strengthen supervision in a small country such as ours where consensus, compromise and political nous, all of which are valuable in and of themselves but are sometimes valued at the expense of independent thought, accountability and the ability to deliver."

Division of labour
She said it would be important to "correctly" establish a division of labour between national supervisory authorities and central single supervisory mechanism staff at the ECB to avoid duplication of effort and additional costs that could "add further to the not insignificant current compliance cost on regulated businesses, [which] in turn are passed to the customer, and lengthen the turnaround for decision making".

She warned that the process of melding together 18 supervisors from different cultures into a common framework for risk assessment, with a common language, and common approaches to inspections and supervisory reviews would require “early practical design questions” .

There will also be a need to develop a common supervisory philosophy and risk appetite, she added.