IN HIS emergency budget speech last April, Finance Minister Brian Lenihan promised to restore national and international confidence in the financial sector following the damage caused by Irish banks inflating a property bubble through reckless lending. Ireland needed to show the world, he said, that “our financial system is soundly based and governed by the highest standards of regulation”. A month earlier, credit ratings agency Standard & Poor’s had downgraded the Irish banking sector for the second time in four months.
Among its reasons for doing so were: “reputational fallout from the events at Anglo Irish Bank” and “weakened investor confidence in the framework of bank regulation”. Anglo Irish Bank misled shareholders about outstanding loans to its chairman and misled the public about the bank’s own financial position.
To his credit, Mr Lenihan has taken steps to fulfill his April promise. He has proposed major reforms in the regulatory system and recently made two important appointments: that of Patrick Honohan as governor of the Central Bank and – this week – Matthew Elderfield as head of financial supervision at the proposed Central Bank of Ireland Commission.
Both are experienced and respected figures in their specialist fields. Their appointment, in tandem with the proposed new regulatory structure, will contribute to the process of repairing a damaged national reputation for financial oversight and has the potential to inspire greater confidence in the regulation of Irish banks and in their financial stability.
The high price paid for light-touch – or so-called principles-based – regulation is apparent in the scale of bank indebtedness. This has produced the biggest banking crisis in the State’s history and left taxpayers with a huge bill, thanks to many poor lending decisions by banks and very lax supervision by the Financial Regulator. The checks and balances in the financial and regulatory system failed to work. Too much easy credit was made available – at low interest rates and on low quality loans – to borrowers without adequate security.
The new Central Bank of Ireland Commission will operate as a single regulator with two functions: to supervise banks and other financial institutions and to monitor financial stability. But this reform, combined with proposals for minimum EU-wide standards of financial regulation, will only begin to restore lost trust in the banking system when the commission demonstrates a robust and independent approach to regulation. It is very badly needed.