Matthew Elderfield has said that the Central Bank "still" needs to "make a lot of changes" to encourage "open dissent".
The financial regulator, who delivered the Galway Chamber of Commerce annual Paddy Ryan memorial lecture tonight, said that the Central Bank was “working hard to learn the lessons of the past” .
However the bank had to be realistic in terms of expectations of its supervisors, as “we will make mistakes from time to time”, Mr Elderfield said, speaking in Galway-Mayo Institute of Technology (GMIT).
“At the Central Bank we still need to make a lot of changes to encourage what one of my board members, Mike Soden, describes as ‘open dissent’,” Mr Elderfield said.
“We are still very hierarchical and need to work in a more joined up way, encouraging debate and challenge between areas. We still are better at analysing risk than challenging ourselves to see if we have landed upon an effective and conclusive mitigation strategy,”he said.
“As a central bank, then, we still need to change our culture as much as our processes. If we aren’t better at challenging each other about management of risk, we won’t be able to raise our game to challenge the CEOs of the high impact firms we supervise,”he said.
“Our approach at the Central Bank is to recruit a mix of skills – industry experience, risk advisers, talented graduates. And we plan to increase our investment in training to improve our capabilities. We have done pretty well so far in our recruitment but I do worry about our ability to recruit certain specialist skill sets and what will happen when markets recover,” he said.
His office regulated 14,100 financial services firms, all of which “pose potential risks – to differing degrees - to the economy or to consumers”, he said.
Mr Elderfield outlined how a new formal risk assessment framework, known as “PRISM”, as in “Probability Risk and Impact System”, would be in place by the end of this year, to provide a more structure approach.
“As a regulator you worry a lot about your high impact events, even if they are low probability, because the consequences are so severe for the economy and the consumer,”he said. “ Ireland is living through the economic equivalent of multiple hurricanes right now, “he noted.
“One of the clear organisational lessons from the crisis then was that we, along with many global regulators, spent too little time rigorously challenging the really high impact firms – those firms whose failure, even if low probability, can seriously damage the economy of a country.”
He referred to three “good reports” on the causes of the banking crisis here - most recently by Peter Nyberg - which all pointed to “the need for a more structured and systematic approach to assessing risk”. “
“To be a risk based supervisor we need to have a risk appetite, “he said.”.“We have set ourselves a risk appetite - a level of risk within the financial system which we are prepared to live with,”he said.
“This means that firms will fail from time to time and consumers will sometimes be mistreated. This may not be that pleasant but it is reality. “ And while failure and problems might be “inevitable”, the central bank’s task was to decide how to deploy resources to prevent problems occurring where they would “hurt the most”, as there weren’t enough supervisors to scrutinise all of the 14,100 firms involved.
“Following consultation with industry, we are now starting to rank all regulated firms using quantitative metrics,”he said. All firms would be categorised as high impact, medium high impact, medium low impact or low impact. High impact firms would always have a high level of supervisory engagement.
The new system would also allow for a “prompt,early and intense supervision” where there was any “alarming spike” in a particular risk type, a particular sector or particular firm,”he said.
His office would be “intolerant of firms which don’t solve their problems, but simply send us further analysis as to why something may not be a problem if only we shared their view of the world”, he warned. He has asked his staff to be “assertive” in challenging management.
Technology which provided automatic alerts for “dedicated triage teams” would apply to low impact firms, he said, and a substantial number required greater compliance. About half of all retail “intermediaries” did not file returns, he noted.
Issues raised in the Nyberg report were being addressed, with “reforms to corporate governance standards designed to broaden the gene pool of Irish corporate life” and with tough new fitness and probity standards and a review of incumbent bank directors”, he said.
NUI Galway and Galway-Mayo Institute of Technology (GMIT) announced a new strategic partnership at tonight's event attended by Mr Elderfield. The partnership aims to "service the educational, social and economic needs of their students and the wider regional, national and international communities".
Both institutions will " work together to develop a collaborative strategy for res earch", and research staff and students will also have access to each other’s research facilities. In addition, in another very significant development, GMIT and NUIG will actively develop joint and dual awards.
Both institutions are also committed to supporting the emerging vision for Galway 2040 and engaging with local businesses and the community in developing and delivering key projects to ensure that Galway continues to grow and prosper.