Banking inquiry should look at support given to regulator and learn the lessons
Opinion: Failure to challenge those who appear to be performing well financially seems to be a recurring issue
Barings Bank: an examination of how Nick Leeson conducted his trades and how he was not challenged might prove useful to the Oireachtas banking inquiry. Photograph: Reuters
To be of value, Ireland’s banking inquiry will need to determine and act upon the weaknesses in its corporate governance system that allowed the underlying causes of the banking collapse to form in the first place.
The main factors that led the banking system to spin out of control and plunge Ireland into the economic depression from which it is still struggling to emerge were not unique to Ireland.
The banks had ill-conceived lending policies, which enabled them to earn large fees and profits over a short period of time. This apparently profitable lending enabled them to raise more funds in the international market, which allowed them to lend even more and earn greater fees, which, in turn, meant they could raise even more money – and so on.
The increased profitability led to big financial rewards for the banks’ management, thus causing them to take a reckless approach to the lending rules imposed upon them both internally and externally.
The banks became too big and treated the regulator as a barrier to their business as opposed to an entity that was supposed to govern it. Auditors had their eyes dazzled by the lucrative advisory fees their firms could earn from a bank’s success. The last thing an audit partner would want was to stop the lucrative consulting work flow by challenging decisions.
These underlying factors were replicated globally, particularly the conflicts between institutions, regulators and auditors. The inquiry should focus on the issues relevant to the governance structure in place in Ireland, where it broke down, and what remedial steps should be implemented.
There is no doubt that governance issues were compounded by the Irish business community being so small. But this was not unique to Ireland. The conflicts associated with a small community were similar in Iceland.
The inquiry therefore needs to focus on understanding the difficulties that the regulator had in managing the financial institutions as they grew both in size, global reach and product diversity.
It needs to examine both the resourcing and funding that the regulators had available to act effectively and it needs to look carefully at the adequacy of the sanctions and punishments that were available to be used against those within regulated entities who provided false or misleading disclosures to the regulators, both knowingly and recklessly.
Relationships with auditors
The inquiry needs to look at the relationships between the banks and their auditors, and the auditors and the regulators. It needs to examine whether too few firms were acting for too many clients.
Was there a conflict between the work that the auditors were doing for the regulator at one institution and the audit work it was conducting for a similar regulated entity elsewhere? It needs to examine the level of consulting fees being earned additionally by the audit firms and determine whether this had an undue influence over their judgment.