Diarmaid Ferriter: Should central role of the Central Bank be the public interest?

Just what is the role of the Irish Central Bank? And whom does it serve? These questions are particularly interesting at the moment because of the banking inquiry and in relation to the controversial issue of whether Irish banks should be forced to match the much lower European interest rates than those applied in Ireland for mortgage holders on standard variable interest rates.

While Minister for Finance Michael Noonan has been throwing shapes about penal intervention if banks do not act to lower their rates, such as the possibility of legislation empowering the Central Bank to regulate rates, its governor Patrick Honohan has made it clear he does not want this power as it might threaten the banks’ “recovery”.

There is a certain irony to Honohan’s stance given the tortured history of the relationship between Irish governments and governors of the Central Bank since its creation in 1943, largely because its governors could not get successive governments to listen to them.

Joseph Brennan, the first governor, was notoriously conservative and abhorred the idea of borrowing for economic expansion; he clashed with numerous ministers who essentially ignored his advice.

Maurice Moynihan, appointed governor in 1961, oversaw an expansion in its role, but the extent to which governments heeded the submissions coming from the bank was still a moot point.

Moynihan was succeeded by TK Whitaker in 1969, who suggested “the role assigned to a central bank is to be cautious, to be the warning light. I feel that the Central Bank may have to say unpalatable things in the future.”

Consultation

True, under his watch its control over the Irish banking system was strengthened and extended with more regulatory powers, but Whitaker wanted more consultation with governments than he achieved, and his articulation of “unpalatable things” was not absorbed.

He did not serve a second term as it could have been regarded as condoning “policies I considered to be wrong”. He believed Fianna Fáil’s 1977 general election manifesto, with its lavish economic promises, was a “crowning folly”.

His successor, Charles Murray, also had his work cut out for him and was similarly frustrated: he failed miserably to prevent expansionary deficit budgets that yielded little productive investment, publicly castigated such financing and called for resistance to pay deals that would exacerbate inflation but was stymied in trying to prevent aggressive credit expansion in the late 1970s.

During the Celtic Tiger era, however, the Central Bank changed its tune and approach: it was undemanding, too hands-off and bought into what its boom- time governor John Hurley referred to in his appearance at the banking inquiry on Thursday as the “soft-landing consensus”.

Hurley appeared uncomfortable in answering questions about the bank’s remit and effectiveness. This was partly a result of what Honohan referred to in 2010 as the “principles-based” supervisory culture at the bank.

In the words of UCD economist Karl Whelan, this meant “there was very little supervisory interference in bank operations. Indeed, the Central Bank had been tasked during this period with a role in promoting Ireland’s financial services industry and presentations from this period to international investors highlighted the ‘user-friendly’ nature of the regulatory approach.

“Whether because of this role or because of other failings, the outcome was a supervisory policy of not-so-benign neglect that left the banks totally unprepared for a slowdown in the property market.”

It was also mistaken in its assurances to the government that the banks were basically sound and just suffering from a short-term liquidity problem.

Appearing at the banking inquiry in January, Honohan admitted “there should have been a greater degree of intrusiveness and assertiveness and a less deferential approach to the banking industry”. But he is happy now that the 2003 decision to separate the institutional regulatory authority from the rest of the Central Bank by establishing the Irish Financial Services Regulatory Authority, which caused too much ambiguity, has been rectified since the reintegration of these roles in 2010.

Blurred

The bank’s focus, he insists, is “no longer blurred” by conflict between developing the financial services industry and regulation. However, does he believe that the bank’s “responsibility is for the public interest rather than the interests of stockholders?”

What about the public stockholdings as a result of State bailouts? Surely there should be a new updated definition of the Central Bank’s responsibilities?

And when it comes to the 300,000 minnows with standard variable rate mortgages, who are being blatantly ripped off, who cares about them?

It is clear the Central Bank – which highlights as one of its missions “consumer protection strategic priorities”– is not interested in championing their cause. So much for “a greater degree of intrusiveness and assertiveness and a less deferential approach to the banking industry”.