WOULD MORE effective regulation of the financial sector – banks and building societies – have deflated the credit and property bubbles before they spiralled out of control? Two preliminary reports that the Government has requested on the regulatory and banking aspects of that crisis, followed by a commission of inquiry, should provide a detailed answer to that question later this year. However, there is little doubt that the failure of both the Central Bank and the financial regulator to supervise adequately the lending activities of financial institutions and to intervene effectively at critical stages contributed to the financial crisis.
Newly appointed head of financial regulation Matthew Elderfield is now proposing to operate a much tougher regulatory regime. It should help repair the reputational damage done to Ireland’s international image and standing as a financial centre and restore investor confidence in the framework of bank regulation and the soundness of the financial institutions operating here.
Mr Elderfield, in his first public speech in his new role on Thursday, declared his firm intention “to implement a framework of assertive risk-based regulation underpinned by the credible threat of enforcement”. The robust model of oversight that he outlined should allow for more effective supervision of the banking and financial sector and involve the regulator adopting a much tougher approach than his predecessor.
Under the new dispensation, systemically important banks will receive much closer scrutiny given their higher risk profile; their failure poses a greater threat to financial stability than banks that are lower-risk. In future, bigger and riskier institutions will have to manage themselves better and, as Mr Elderfield has also made clear, their managements will be held more accountable for their actions.
This hands-on approach remains in marked contrast to how the former – largely passive – regulatory regime operated. Then, regulation, which was largely “light touch” self-regulation by the financial institutions, lacked a credible threat either of effective intervention or of strict enforcement of rules. Anglo Irish Bank misled its shareholders about outstanding loans to its chairman and misled the public about its real state of financial health. And the public’s watchdog, the financial regulator, failed to bite or bark.
Clearly, a tougher and more assertive approach to financial regulation is needed. For that to succeed, new legislation and more resources will be required: both to give the regulator the necessary powers and the extra staff (to include special investigative units) that he needs to enforce those powers. Ireland, as the financial regulator has pointed out, is competing as a premier financial services centre. “But you can’t referee a premier league match with one linesman and no red card in your pocket.” What Mr Elderfield has proposed represents an important part of the new financial architecture that is needed, both to restore credibility to the regulatory system, and to help restore the lost confidence of the public in the banks.