Central Bank sharply critical of proposal for new regulator

The Central Bank has sent a strongly worded warning to the Minister for Finance, outlining what it says are significant risks in setting up a new financial regulator.

The official response from the board of the Central Bank, chaired by governor Mr Maurice O'Connell, is sharply critical of the committee report, saying it fails to draw attention to the "potential downsides" of a move to a new "greenfield" regulator.

The Minister had asked the Bank for its response following his publication of the report from a committee, chaired by Mr Michael McDowell, which is likely to be considered by the Government in September.

In the strongly worded riposte, seen by The Irish Times, the Central Bank warns that removing regulation from the Central Bank involves risks to the Republic's international reputation and that of the IFSC.

It could also necessitate a substantial voluntary redundancy programme for the Bank's staff, it warns.

According to the Bank, it is quite unlikely that there would be a seamless transfer of staff to a greenfield operation. "This could create serious problems for the new regulator, for the industry and for consumers. The avoidance of loss of expertise is one of the more important advantages that the Bank's model would have over the greenfield option," it argues in the 14-page response.

It also points out that supervisory staff account for almost one-third of total Central Bank numbers. If significant numbers of staff opted to remain in the Bank - as the Bank says would be their right - there would be serious "reabsorbtion" problems. This would possibly require a costly and disruptive voluntary redundancy scheme, it points out.

The response, which was not sent to the Tanaiste, Ms Harney, also argues that there could be problems around the new regulator's international regulatory reputation.

"It could take a long time for a new authority to acquire an international reputation as good as that of the bank. Such a reputation is a prerequisite for the continuing high success rate of the IFSC."

The response is also critical of the failure of the McDowell report to address a number of issues including industrial relations problems, costs and duplication.

The Bank also strenuously resists the argument in the committee's report that the governor is not accountable. It repeatedly stresses that this is a "flawed argument" and stresses it is very concerned that it should feature prominently in the case for a greenfield option.

Referring to the opposition of its own representative and that of the Department of Finance it says: "The minority's rejection of the greenfield approach is based on the high-risk nature of such a strategy and the absence of any compelling case for such a radical change in policy."

The Bank also insists that a model put forward to the committee, under which a new regulatory authority would be set up within the Central Bank, would be more cost effective than the greenfield structure because of significant economies in the use of the Bank's central support services.

In addition, because the Bank must continue to have supervisory responsibilities under the Maastricht Treaty, there would be duplication of effort.