ONE OF the clearest lessons of the global financial and economic crisis has been the failure of regulatory authorities almost everywhere to prevent it. National watchdogs failed to bark loud enough to alert their governments to emerging problems. National regulation proved inadequate. Supra-national supervision of global banking operations was largely non-existent.
As a result, governments everywhere are rushing to reform regulatory systems. Minister for Finance Brian Lenihan will bring his proposals for change to Cabinet within weeks. In Britain, the chairman of the Financial Services Authority has promised a “revolution” in financial regulation. In the US, President Obama has pressed Congress to pass regulatory reforms and challenged other countries to follow suit. And a European Commission taskforce last week proposed two separate bodies to oversee and co-ordinate supervision of the financial system in member states. A risk council would operate under the European Central Bank and issue risk warnings that national regulators would follow up. A European supervisory body operating in three areas – banking, insurance, and securities – would co-ordinate the work of national regulators.
Nowhere has regulatory failure been more apparent or more damaging than in Ireland. Anglo Irish Bank’s annual report and a heavily edited version of the PricewaterhouseCoopers study of the bank’s recent operations have revealed poor risk management practices, reckless lending, flagrant breaches of corporate governance and wilful deception of shareholders and investors. Much of which, it seems, then Financial Regulator chief executive Patrick Neary failed to detect and address. The inadequacy of “light touch” regulation is obvious. Taxpayers have been left with a huge bill and Ireland’s international reputation has been greatly damaged.
Mr Lenihan has promised major reforms and a more stringent regulatory regime including giving the Central Bank power to curb excessive bank lending. The Taoiseach confirmed also at the weekend that the responsibilities of the Central Bank and the supervision and regulatory roles of the Financial Regulator will be merged into a new central banking commission. Within it, there will be a new head of banking regulation with an international reputation. However, the existing regulatory function has been hamstrung by a lack of independence from the system it was set up to the police. The Government must explain how this shortcoming can be overcome by reinforcing its association with the Central Bank.