The Central Bank is required by law to maintain confidentiality in its role as supervisor of the financial institutions but this does not mean it does not deal with problems that arise, according to Central Bank governor Mr Maurice O'Connell.

"We cannot reveal what we have discovered in relation to a particular institution. The Revenue Commissioners are in the same boat. We cannot tell, but we act. If there is any trace of criminal activity we go to the Garda. Short of that we make a serious response. Removing directors or management is a serious response."

He has signed warrants in a hurry to send inspectors into banks, he said. "This would not have always been because of malpractice. It could have been because of incompetence or evidence of an unacceptable level of financial risk," he explained. But he declined because of the confidentiality requirements to disclose any details of investigations or actions taken.

Mr O'Connell declined to discuss the National Irish Bank situation other than to say: "I will make no judgments until we have all the facts. Anything else would be wrong. In the welter of accusation and confession the only important factor is that the truth emerges and the issues are resolved."

The Central Bank's priority is the protection of depositors and the stability of the financial system, Mr O'Connell explained. "Remember the depositor is a customer too. Come to think of it, we are the only lobby for the depositor. Ultimately what is of vital importance to us is the integrity of the banks and high standards in them. That in itself is a protection for the borrower as well as for the depositor. It is vitally important that the board and the management act to high standards."

But Mr O'Connell would have no problem with the extension of consumer protection and would not be concerned if this was allocated to another body.

Setting out how the Central Bank carries out its supervisory role over the banks and the building societies, Mr O'Connell said that when his staff go to inspect a bank, one of the things they look at is the quality of the loan book, the financial accounts. Spot checks are carried out on departments - for example, treasury departments. The bank's focus is on risk management and a bank's control systems.

The Central Bank does not examine individual customer cases and does not go into branches in the normal course, he explained, adding: " We do not see ourselves as having that responsibility legally".

"It would be unusual for us to go into an individual branch because the volume of business in any branch is so small relative to the total operation . . . We would rely on the internal audits reports and on the external auditors who are required by law to report any malpractice to us."

One of the safeguards in the system is the requirement that external auditors notify the Central Bank where malpractice is found or suspected, he added. Mr O'Connell said external auditors "have been in contact with us from time to time". He declined to disclose if the Central Bank had seen the internal audits for NIB branches or had had contact from the bank's external auditors. Part of its regular inspections involves looking at bank governance, which include the structure and membership of the board, experience and background of management audit structures and lines of reporting.

"First and foremost it is the duty of the institution itself to run its operation properly and if it does not it will have to account for this," he said. Normally appointments to the bank boards and appointments of senior management are notified to the Central Bank in advance. "We would have an opinion on these," he said, inferring that appointments which did not meet the Central Bank's approval could be blocked. "Over the years we have had some very difficult cases. We have had to take some forms of action," he said, declining to give any further detail.

The Central Bank has protected borrowers by putting pressure on the banks to put ceilings on interest rates over the years, he pointed out, adding that this role will disappear with EMU.

"But our main approach has been pushing for competition and transparency of charges," he said.

The ultimate sanction the Central Bank can impose is the revocation of the licences that banks need to act as deposit takers. It has never happened so far, not even in the Gallagher case. The circumstances in which it can happen are spelt out in the Central Bank Act 1989. They include conviction of an offence involving fraud, dishonesty or breach of trust.

"Revoking a licence is a very serious affair. The question for us is whether it would be in the interests of depositors. Transferring a licence is much smoother for depositors," Mr O'Connell said. This transfer would involve the sale of a bank to an institution approved by the Central Bank to have a licence.

The next layer of Central Bank powers includes requiring the removal of members of the board or management of a bank, limiting the activities of a bank or placing conditions or restrictions on what a bank does. "We have done some of these over the last 10 years," Mr O'Connell said, adding that he could not disclose the details because of the legal requirements of confidentiality. The Criminal Justice Act was a watershed in improving the culture of compliance within the banks, he maintained. Since it came into force in May 1995, the financial sector has sent about 1,200 reports on suspicious activity to the Gardai. There is a far greater realisation of the needs of consumers now than there was in the 1980s, according to Mr O'Connell.

In 1989 the Central Bank was responsible for approving bank charges - this was taken over by the Director of Consumer Affairs in 1995.

Commenting on the letter sent by NIB's then head of retail, Mr Frank Brennan, to other bank executives in which he described the Central Bank as "naive and simplistic" in relation to its view of how interest rate bands should operate, he said the comments were "entirely harmless and inoffensive".

"It is part of the normal cut and thrust of what goes on . . . we were trying to impose our view." The Central Bank wants the Irish banks to be "strong". That means well capitalised, with strong liquidity and no solvency problems, he said. "Banks have to be profitable. The day a bank ceases to be profitable, that is when we have other problems."

There was no conflict for the Central Bank in ensuring that banks were strong and profitable on the one hand and in protecting the consumer on the other, Mr O'Connell maintained. "The two go together. Competition looks after bank profits. It is facile to suggest that protecting the consumer is in conflict with banks making profits. Protecting the customer involves making sure he is properly informed of the contract and arrangements he enters into," he said. The Director of Consumer Affairs, who is responsible for bank charges, has a role here, while the Ombudsman for financial institutions has a role in investigating complaints, he added.

Profits of the Irish banks were "no better or no worse" than banks elsewhere, he insisted. "In a strong economy you would expect profits to be strong." Commenting on a recent survey which found that Irish banks were the most profitable in Europe, he speculated that there may have been "imperfections" in the survey, but insisted that it was a matter for the banks to answer.

Mr O'Connell has no complaint about the resources he has to carry out his supervisory role and explained that he is free to increase his supervisory teams if he sees fit.