Honohan set on enforcement despite legal risks

THE GOVERNOR of the Central Bank, Patrick Honohan, has said he is determined to see “a renewed emphasis on enforcement” in financial regulation, even if there is a risk of incurring legal costs in unsuccessful cases.

Speaking to the Financial Services Ireland (FSI) annual dinner last night, Dr Honohan said legal restrictions on confidentiality can “greatly circumscribe regulatory freedom of action to the point that the regulator can end up appearing passive and defensive”.

He said he was prepared to lose court cases taken in good faith where the regulator’s legal powers prove “insufficient” but he was confident that legislative changes would be made if the regulator’s legal powers proved inadequate.

In a wide-ranging speech on the failures of past regulation and how he intends to change financial supervision, Dr Honohan said that there were “fairly basic violations of good governance practices to say the least in some institutions”.

The regulator had “lost sight” of details of the banks’ loan portfolios, did not scrutinise the quality and extent of collaterals and guarantees given by big borrowers – “information that could not have been available to outside commentators” – and “ultimately failed to question the robustness of business models”, he said.

“Accordingly, the supervisors were no longer really in a position to challenge the banks’ complacent view of the security underlying the property loans they were making and of the threat to their survival,” Dr Honohan said.

The governor said it would have been “unpopular to call an abrupt halt to an intoxicating, profitable boom, even one driven by banks that had lost the run of themselves; but it not clear that any of the authorities considered it necessary to make that call”.

The regulator had adopted a more intrusive approach to the supervision of firms, he said, and while the banking supervisors would “undoubtedly continue to be much more hands-on than in the past”, the style of engagement, while appropriate now, would not be quite right in the long term.

Dr Honohan warned that the Central Bank could not continue paying half the costs of regulation. “Moving to a 100 per cent charge-back arrangement for at least some of these activities seems inevitable to me,” he said.

Dr Honohan said that international developments in the desirability of far-reaching changes in financial regulation firms would help define standards at home. “We will not be a guinea-pig for half-baked novelties, but I will certainly not allow Ireland to become a soft option for firms or activities that are no longer welcome elsewhere,” he said.

The primary onus for the sound operation of banks “must fall on the directors and management of the banks themselves”, he said.

Dr Honohan said that high salaries must be paid in financial services in certain circumstances. “We have to be realistic price-takers and acknowledge the opportunities these individuals have in a competitive world market which still rewards these attributes very well,” he said.

FSI, which is part of employers’ group Ibec, urged the Government not to increase income taxes in next week’s budget.

Brendan Kelly, director of FSI, said the higher rate of tax had risen from less than 44 per cent to more than 52 per cent over the last 18 months and there was a fear it could rise to 58 per cent in 2010.

“While we can all understand why some people may advocate this, we shouldn’t pretend that it is good economics,” said Mr Kelly.