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Cliff Taylor: Proper bank regulation is about people and not process

Splitting the Central Bank up again is not the answer. Changes are needed in regulation and in the bank boardrooms.

The Central Bank of Ireland: The bank has been broken up and put back together again over the years. It is hard to see another divorce achieving much. Photograph: Alan Betson

When scandals or controversies come to light in this country, there are three reflex responses. The first is a call for an investigation, inquiry or even a tribunal. The second are demands for the creation of a new “body” to deal with whatever it is. And the third is the insistence that new legislation or rules are needed to deal with this.

We are particularly fond of the second one – the creation of a new body to “ sort things out”. Debating this avoids the awkward questions of who didn’t do their job the first time out as it can be presented that things fell “ between stools”.

But changing the brass plate on the door is rarely the answer. What is needed in most cases is for people to do their jobs – and apply the rules that are there. In the wake of the tracker scandal, calls to split up the Central Bank and create some kind of new consumer financial czar would be just another exercise in optics. It would be a quick fix used to avoid the real issues.

The Central Bank has been broken up and put back together again over the years. It was first split up in 2002, in response to letting a number of scandals slip through in the 1990s and then, of course, put back together again after the crash. It is hard to see another divorce achieving much – and it would cost time, require the shifting of powers to a new agency – and arguably damage the overall regulatory effort by splitting the flow of information back into two streams.

What we need are new approaches, not a new brass plate on the door.

The Central Bank has plenty of consumer protection and enforcement powers – and also as we saw in the last few weeks, the power to bring things into the open. And whatever any regulator can or cannot do in future, it’s the attitude of the banks that is going to be central to this.

Criminal investigations

The Central Bank is to report to the Minister for Finance by December on whether the banks have made enough progress in addressing the tracker issue. In some cases, criminal investigations may be launched and big fines for the banks are certain. This is an essential part of what must happen.

But perhaps a more important document will also be filed at the same time. It will look at the issue of the culture of the banks, how it can be changed and whether any regulatory or legislative changes are needed.The response to the tracker scandal has shown that, in some banks at least, culture is still a big problem, a point which the Central Bank has already been trying to respond to in its regulation.

In putting together its report on banking culture, the Central Bank is likely to look to the Netherlands, where a change of approach happened after the financial crash and the need for the State to bail out ABN Amro.

Supervision of behaviour and culture is now a major theme in the Netherlands. In a book on the new approach the Netherlands Central Bank, the prudential regulator in that market, explained that it decided after the crash that “our supervisory scope should be extended to include the people behind the facts and figures”.

In 2010 the bank extended its supervisory team to include experts in behaviour and culture and started a range of examinations. They now look at things such as how targets are set, organisational culture and risk management. The role of bank boards, how they work and how they interact with executives, is looked at in detail . It is all driven by an assessment of where risks exist

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Accountability

A lot of this is about accountability – something we rarely see in Irish political or business life. According to the Netherlands Central bank in a book on their new approach, “the ripples caused by a pebble thrown into the water have a distorting effect – it is not the pebble that should be held accountable, but the hand that threw it”. We have yet to see this happening in relation to the tracker scandal, though the Central Bank has said it will address this issue.

Risk is a vital factor in regulation. Sometimes this risk is to financial stability but sometimes it is of the consumer being screwed. Consider the tracker affair. The cost to the banks of raising funds shot up as the crisis broke and offering trackers quickly became unprofitable.

This was made worse when, in 2010, the ECB starting to kick up about the banks’ use of cheap emergency central bank funding. It was trying to safeguard its position, fearing it would never see its cash again. The banks moved to try to lower the cost of trackers by pushing people off them. Everyone was looking after their own “book”. Consumers were left exposed at the bottom of the chain, as everyone else ran for cover.

Mortgage switching

There is wider consumer agenda in financial services too. For example, the Competition and Consumer Commission in a recent report looks at how issues such as making mortgage-switching easier and encouraging competition could give consumers a better deal. The report also pointed to the longer-term agenda and to how Ireland might look to develop long-term fixed-rate mortgage products based on longer-term bank funding and thus give much more certainty to both lender and borrower.

That is the kind of way we really start to improve the outlook for the Irish consumer. There is no point aiming for short-term fixes here and new “watchdogs” – that would be just window-dressing.