ECB injection questioned

The Irish Financial Services Regulatory Authority will question the effectiveness of measures taken last month by the European Central Bank (ECB) to boost market liquidity when it meets other European regulators over the coming weeks.

The regulator also wishes to discuss with its European partners the matter of ratings agencies, and whether there is a conflict of interest involved in their assigning ratings to funds managed by entities to which they also sell services.

The regulator is due to raise these issues at a number of scheduled meetings this month, during which the near collapse of German regional bank Sachsen LB will also be discussed.

The bank needed a €17.5 billion bailout from its regional competitors in Germany after difficulties developed with its Irish-based conduit funds, which had investments in the US subprime market.

A source in the German financial markets regulator, BaFin, told The Irish Times it had no criticism about its Irish counterpart's role in relation to Sachsen LB, whose IFSC-based subsidiary, Sachsen LB Europe plc, managed the troubled conduits.

Conduits are not the subject of direct regulatory supervision.

The source said Sachsen LB was subjected to close supervision in Germany and had been the target of on-site inspections. He said investment decisions were the job of management and not of the banking regulator.

A spokesman for the Irish financial regulator questioned whether more could have been done by the banks with the substantial extra liquidity recently released by the ECB. "Despite the injection of additional liquidity into the system, the liquidity has not necessarily channelled down to the areas where it may be needed most," he said.

"As regulators, we need to discuss this, to examine why this is the case and what regulatory response may be required. This issue is most appropriately considered at an international level."

The financial regulator has not called on the ECB for any special liquidity measures, he added.

The chief executive of Sachsen LB announced his resignation on Wednesday. Herbert Seuss (67) is to leave the bank on September 15th. Two management board members, Yvette Bellavite-Hövermann and Werner Eckert, have also left the company.

Last weekend, Germany's biggest regional bank, Landesbank Baden-Württemberg, agreed to buy Sachsen LB for €250 million.

Sachsen LB faces the prospect of investigation by German prosecutors over how a small regional bank lost billions of euro on high-risk investments in American mortgages.

Before the takeover, Sachsen LB was owned by the regional government, savings banks and local authorities in Saxony. The state-appointed managers, its supervisory board and Saxony's finance ministry all ignored warning signals that the bank's speculative investments through its Irish-based operations were too risky, experts have said.