Roux needs a thick skin to survive but it will be worth it

Since becoming financial regulator on October 1st last year, Cyril Roux has kept a low profile. Save for a speech delivered to guests of a Financial Services Ireland dinner before Christmas, the Frenchman has spent his time getting to grips with a brief left behind by Matthew Elderfield, who departed for a more lucrative role with Lloyds Banking Group.

Elderfield’s mission was to rebuild the regulator from within after the mismanagement of the financial sector during the credit bubble, to make it fit for purpose again and to restore its credibility. He won new powers from the Government and bulked up its enforcement unit.

The Englishman showed his mettle in the first half of 2010 by moving against Quinn Insurance, the beginning of the end for Seán Quinn’s control over his business empire.

Elderfield quit Dame Street early with praise from governor Patrick Honohan ringing in his ears although some in the financial industry here would argue that he was a tad heavy-handed with fines for minor rule breaches.

They also wonder how the issues that have emerged at our largest insurer RSA could have happened when the oversight regime was supposed to be so much more robust than in the pre-crash years.

In fact, the RSA issues were uncovered by the Central Bank in August following an audit on foot of concerns about the company.

Investigating the issues at RSA is just one of the many important items on Roux’s plate for this year, a year that could prove to be an important inflection point for the Irish banking sector.

In no particular order, he will have to oversee the compliance of mortgage lenders with the Central Bank’s arrears resolution targets; deal with the European Central Bank’s stress tests, which will determine if our banks need more capital; participate in the setting up of the new single supervisory mechanism (SSM) for the euro zone; and select new supervisors for the banking and insurance sectors here, roles that were combined under the watch of the soon- to-depart Fiona Muldoon. All of that and a lot of nitty, gritty regulatory stuff that rarely makes the headlines.

The mortgage arrears problem is a major issue and one that has been festering for some time. It appears intractable. Figures for the third quarter of last year, showed that the number of private dwelling homes accounts in arrears of 90 days or more had risen by 1,315 on the previous quarter to 99,189.

Yet there is a chink of light. The number of early arrears – less than 90 days – was down 6 per cent, probably due to improved economic conditions.

As it stands, the banks who are subject to the Central Bank’s targets are only required to have concluded solutions with 35 per cent of their arrears customers by the end of June.

So it would be foolish to think that this problem will be resolved this year. It might even take the full five years of Roux’s contract to complete.

Difficult decisions will have to be made by the banks, namely repossessions or voluntary sales, which pretty much amounts to the same thing.

Talk of repossessions is enough to make most Irish politicians break out in hives and undoubtedly there will be a lot of indignation from members of the Oireachtas as the cases go before the courts.

But repossessions are inevitable as a lot of people simply can’t afford their boom-time mortgages, and there won’t be wholesale write-offs by the banks. Roux will need a thick skin to survive the flak.

The ECB’s capital stress will also be key this year. In 2011, a domestic PCAR (prudential capital assessment review) resulted in the banks needing an additional €18.7 billion in capital. But Irish banks were in the horrors back then.

The methodology for the ECB tests will be agreed upon next month after which a round of balance sheet assessments will begin across the euro zone area.

Roux will be hoping that Ireland will be excused some or all of this exercise given that such assessments were carried out on AIB, Bank of Ireland and Permanent TSB in the second half of last year, at considerable expense, to satisfy the troika before we exited our bailout.

The actual stress tests won’t begin until July with the results due in October, just before the SSM is due to formally begin life in November. AIB, Bank of Ireland and PTSB are all comfortably above the 10.5 per cent core tier 1 capital ratio required by the Central Bank here, which in turn is a couple of points higher than what is required at European level.

So there shouldn’t be a problem, but we won’t know until the rules of the game are published and the results are established. It all depends on what questions are asked in the tests.

The SSM is a game changer for banking in the euro zone, with Frankfurt taking overall responsibility for supervision of the banking sector.

Roux will be a member of the SSM supervisory board, which is being is chaired by Danièle Nouy, his former boss at the French regulator. Had he stayed in France, he would probably have been in with a good shout of getting her job. Instead, he pitched his tent here for no financial gain.

Succeed here and Roux will surely land a plum role somewhere in the European financial sector, as Elderfield did before him.