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The Inquisitor
06 December 2009 By Richard Curran
We still have not had an adequate investigation into the causes of the banking crisis, but Patrick Honohan, the governor of the Central Bank, gave some idea of what he would tell such an inquiry when he addressed the Financial Services Ireland annual dinner last week. Honohan gave an extraordinarily frank speech, in which he outlined more than a few home truths.
He stated that the move by the Financial Regulator towards a different regulatory approach, in light of the Basel II requirements, was part of the problem. He added that the old practices in relation to regulation were more appropriate for the relative simplicity of the Irish banking sector, but they were abandoned.
He also said that there had been fairly basic violations of good governance practices in some lending institutions, but that both the banks and the regulator were caught up in the exuberance of the boom years -e specially after 2003. ‘‘It would, of course, have been unpopular to call an abrupt halt to an intoxicating profitable boom, even one driven by banks that lost the run of themselves."
Peter Oakes, managing director of Compliance Ireland, said that this comment appeared to contradict the version of events given by Honohan’s predecessor, John Hurley. He has said that, on a number of occasions, he issued warnings about what was going on -particularly in the housing market -but he did not have the powers to do anything about it.
Oakes also drew attention to what he described as a ‘‘bombshell’’ delivered by Honohan in his speech. Honohan said that, to be appointed a director of a bank, a person must be deemed fit and proper by the regulator. ‘‘Yet, if the regulator subsequently revises their opinion and decides that a director is no longer fit and proper, it’s not as clear that there are comparably explicit powers to remove that person."
Oakes rightly asked who drafted this code. Honohan’s comments on this subject suggested that he and/or his predecessors had checked out the legal position in recent months, especially following all the shenanigans which had gone on, and concluded that it wasn’t really clear what the powers were.
Honohan set out his stall when he said there would be a renewed emphasis on enforcement, even at the risk of the regulator incurring legal costs in unsuccessful actions.
This is exactly the kind of gung-ho approach that we all want to see. Unfortunately, it will have come too late in relation to the billions of euro that Anglo Irish Bank, in particular, is likely to cost the taxpayer.
Honohan obviously wishes to set the record straight in relation to who was responsible, but clearly doesn’t want to alienate his inherited senior executives or staff by laying too much blame at the door of the Central Bank and Financial Regulator.
Oakes concluded that Honohan’s remarks on the abandonment of the old-style approach showed that the Financial Regulator was out of its depth, and failed to understand its statutory objectives. ‘‘Because of these two critical failures, it was not capable of challenging recklessness by the banks," he said.
He also said he believed that the Financial Regulator was negligent, probably to the extent of being culpable.
All of these issues need to teased out in a proper, clearly-defined probe, into the origins and reasons behind the banking crisis.
The British House of Commons has already completed two such investigations and made public recommendations. We, however, are still floundering on this issue. The priority appears to be sorting out the crisis and then letting the academics debate the issue for the next 20 years.
But understanding the banking crisis and failure of public policy and regulation are not the preserve of obscure academic debate. They are fundamental to constructing a new system which ensures that it doesn’t happen again.
Perhaps we are all partially culpable.
If so, we should examine that possibility and conclude that is the case. The country needs, and the public deserves, a proper investigation into the banking crisis.
Finally, the biggest bombshell dropped by Honohan to the bankers gathered at the dinner came when he said: ‘‘My personal philosophy makes me feel more comfortable in an environment where the distribution of income is somewhat more equal than has been generated by the financial systems of the advanced economies in recent years." No doubt they choked on their brandies at that one.
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