Fed now part of inquiry into Allfirst
The Washington-based US banking regulator, the Federal Reserve Board, has joined the locally based Federal Reserve Board of Richmond to carry out a detailed investigation of AIB's US subsidiary Allfirst.
Two senior regulators from the Irish Central Bank arrived in Baltimore yesterday to carry out their own investigation of how the loss of $750 million (€859 million) was racked up at the Allfirst treasury. In Dublin, the Central Bank is examining treasury controls and procedures within the AIB group.
AIB has ordered its own "comprehensive investigation" to be completed within 30 days but said yesterday it had "not determined yet" if it would publish this report.
The regulators will not rely on an internal bank report, in effect self-investigation, to make an assessment of what happened at Allfirst and decide what action they will require to ensure it does not happen again. One angry AIB shareholder who called The Irish Times yesterday said he considered it "wholly inappropriate that they are investigating themselves, the failure of their own controls and checks and balances".
AIB said its report would go directly to the AIB board and would not be reported through the group executive committee.
The Central Bank is the regulator of the AIB Group. The Federal Reserve Bank of Richmond is the first line regulator of Allfirst, which is a subsidiary of AIB but is a US bank with a US banking licence. The Richmond Fed would regularly inspect Allfirst to see the proper procedures and systems were in place and that its rules were being followed. It would communicate with the Central Bank about Allfirst and pass on any information it considered relevant to the Irish regulator.
In its role as group regulator, the Central Bank visits Allfirst every year to 18 months to talk to local management. The last visit to Allfirst was in May 2001.
But the Central Bank is now doing an inspection at Allfirst because of the scale of the losses. It has approved the outline of the internal investigation underway at AIB Group.
Banking sources said the involvement of the main US banking regulator signalled the seriousness of the situation in the US banking industry. "This is a high-profile situation in the US and the Washington Fed wants to ensure it is well informed," one source commented.
All of the regulators now trawling through Allfirst are looking to establish how the loss arose and to establish the roles of Allfirst systems procedures and staff. The regulators will interview staff at all levels, and will conduct a detailed trawl through records, files and accounts.
In examining the controls to manage risk, they will want to see if there was clear segregation of duties between front and back office staff in treasury, how contract confirmations, reconciliations and settlements were handled, how the internal and external audit procedures operated and whether the required daily, weekly and monthly evaluations were prepared.
While AIB has put a 30-day deadline on the production of its report, the regulators will take as long as they require to establish what happened, how the controls failed and what new regulations/ procedures may be required.