The Central Bank of Ireland Commission Post author By Philip Lane Post date June 18, 2009 Minister Lenihan has announced the new financial regulatory framework for Ireland: details here. Categories In Banking Crisis, Economic Performance Tags Irish central bank 9 Comments on The Central Bank of Ireland Commission ← Irish Society of New Economists Conference → Baby Boomers 9 replies on “The Central Bank of Ireland Commission” The main emphasis of the Minister’s press release is on regulatory structure and accountability for regulation (the establishment of a Commission, accountability to the Oireachtas, etc). Is anyone suggesting that structure and accountability have been the main problems? As an outsider to the world of financial regulation it appears to me that key problems of the regime we have relate neither to structure nor accountability, but rather to how it operates and in particular how the regulator acquires and uses knowledge about the activities of those it is overseeing. In fairness the Minister’s proposal to beef up expertise does address that issue. To the extent that the light touch is a product of the culture of government-business relations in a small economy the implicit ambition to recruit from overseas (and thus recruit network outsiders to key posts) addresses that issue. What is not addressed in the statement is the failures of market actors. If I were the Minister I would duck this question too. Just as the systemic risks associated with market practices were not well understood, the steps necessary to promote appropriate market activity, where most of the knowledge and capacity lies with the firms rather than the regulator, create an immense challange. This challenge can be addressed through processes which promote the sharing of knowledge within the sector and the implicit enrolment of those with knowledge and capacity to oversight functions alongside the regulator. One thing we should have learnt from the financial crisis is that re-casting of the regulatory environment cannot be dependent on the financial regulator (with whatever structure and accountability) alone. Never mind whether it is good for Ireland, or an improvement on the best system the same minds had thought up a few years before, the real question is: how many jobs for economists? Hundreds? Clearly a good idea. Two? Clearly light on expertise. When I was an accounting student, audit clerking, the practical effect of having one person or team do half of the task and another person etc do the other half was manifest: unless they colluded, discrepencies were immediately flagged and the system was self policing. It was planned into the structure of the enterprise! I guarantee that this will not be a part of the new system. Whoever is the regulator can still say s/he was never told what the dogs in the street knew….. Have fun with the next crisis which is on the way! Its vital that the appointments of the three top people be not only transparent but seen to be so. There needs to be open competition to fill these roles; it should be under the TLAC; the shortlisted people should be grilled by perhaps the Joint Economic Regulatory Affairs Committee; they should be required to have senior academic and professional qualifications as well as a minimum of ten years industry experience; they should not have been employees of any irish bank or financial company or public sector organization in the last 5 years; they need to be on a 3 year contract with a 2y extension by 66% dail vote and then out. We need “mani puliti” here While I agree with the basic thrust of Colin’s argument, I think the issue of accountablity is important and particularly challenging given the highly political context that any system of financial regulation operates within. Simon Johnson, of MIT and formerly chief economist of the IMF, had a fascinating article in the May edition of the Atlantic Monthly on just how the relationship between financial actors and the broader US political system has evolved over the past 30 years. The fact that it is titled “The Quiet Coup” summarises how he perceives what has happened. http://www.theatlantic.com/doc/200905/imf-advice While Johnson may be somewhat extreme in his argument, it is difficult to disagree with his broad conclusion. Finding means of trying to counter such influence has proven to be extremely difficult so a level of regulatory capture has usually resulted. Robust and transparent structures of accountability are therefore essential for a regulatory system to operate in the interests of a broader public good. The good news, for the moment, is that given the scale of the cost of our regulatory failure, there is unlikely to be any lack of interest in both the Oireachtas and the media in holding the proposed new system to account. What is still required in the Irish context is a broader debate about the merits of the proposed new structure. A more detailed explanation from the Minister as to why he has chosen it would be informative. It’s still challenging to understand the rationale of splitting off the consumer education function into the merged Competition Authority/National Consumer agency. If one issue is clearly vital over the longer term, it is that of educating the broader public about the risks and rewards of financial products. In terms of debate, it is interesting to observe the intensity of the discussion in the US about the Obama administration proposed reforms, and the open disagreement between Darling and King in their respective Mansion House speeches. Such a debate is equally necessary in an Irish context. “The reforms will be supported by a significant expansion of regulatory capacity within the new structure. Substantial additional staff with the skills, experience and market-based expertise needed to meet the objectives of the new structures will be appointed. Those recruited will also have the expertise to regulate the international financial services sector.” where were these people when the crisis was brewing? Was there a special reserve of ‘we ACTUALLY know what to do’ regulators that hadn’t been hired? if so it would have been cheaper to get them on the books earlier, although I doubt that to be the case. Essentially it will just mean more people running in circles c. the central bank building. @brian lucey you should submit that hiring idea to them! Its good. The only issue is that many of the people who know who/how to catch people are those who know the system from the inside. That or hire from abroad as well. I posted the following on Thepropertypin.ie: Does anyone understand the rationale for these proposals. The press release is totally lacking in analysis of the problem. Perhaps that’s because the Irish banking crisis originated at the moment when a major reform of financial supervision took effect. Everyone agrees that the Financial Regulator failed and P. Neary was the obvious scapegoat since that Prime Time interview but what structure of supervision would have prevented the disaster? There has been no inquiry or report which would identify the problems with the existing system so how they they set out designing a new system? Why should we have any more confidence in this new system? There are some worrying signs: “The process of recruiting the new Head of Financial Supervision is already underway, under the auspices of the Central Bank and Financial Regulator…” So the CBFSA, the failed system, is recruiting the new boss. What clearer sign that nothing will change! “The search for the appropriate candidate is wide-ranging in order to ensure that the person chosen will be of the calibre, reputation, experience and expertise to lead the reform outlined.” Wide-ranging – good word. Suggests a lot but means nothing except that external candidates are being considered. But remember, the recruitment is “under the auspices of the Central Bank and Financial Regulator” you can bet that an insider will get the job. They’ll just have to spin the story so the next Patrick Neary comes across as a new broom. Andrew Large is mentioned frequently as the chief advisor. Former Deputy Head of the Bank of England – I would think that was a disqualification? _________________ An Accidental Philosopher http://lefournier.blogspot.com/ @Karl doubt if they would listen… Based on the Minister’s announcement, it is exceptionally difficult to see how the proposed changes should be any more effective then the current structure commenced merely 6 years ago in 2003 by the Central Bank and Financial Services Authority of Ireland Acts (2003 & 2004). No one has debated the workings of the current law or the structures created thereunder. However the Minister and media commentators all appear convinced, without offering any meaningful explanation, as to why the existing structure (both legal & organisations) failed – no one in the regulatory or government structure has been held accountable to explain why they failed in their roles. There was ample power under the law to react and react swiftly. All regulatory components have the power to do what is reasonably incidental to their core functions of stability, orderly financial markets and supervision of regulated players – i.e. intervene and give directions to regulated firms and the markets generally. The CBI & IFSRA (and arguably the Minister) simply ignored those powers, perhaps frightened of using these powers without the safety net of judicial interpretation. It is interesting, therefore, to see that the CBFSAI is recruiting for a senior General Counsel to advise the CBI & IFSRA on the laws which are going to be replaced – the horse has bolted) who should have been in place years ago together with a top notch COO to ensure that (i) statutory objectives are met, especially if the CEO fails (i.e. the role of the COO) and (ii) sound legal advice is provided to the CBI & IFSRA (i.e. General Counsel). This way, where a CEO fails – as is clearly the case – others operate as a check & balance and more so where the Board of the CBFSAI and IFSRA were clearly out of their depth. Let’s not kid ourselves, the cost to implement the new regulatory vision will be in the millions of euros – if not 10s of millions – (the rebranding will cost euro 250,000 alone). I have worked at two regulators – UK & Australia – which went through restructures and such changes do not come cheap in terms of money, lost management time, staff morale problems and regulatory disruption. The flipside is, of course, what will be the cost to Ireland if the structure is not radically reformed? However you do get the feeling that the human resources element – as opposed to the letter of the law and the exact nature of the current structure – was a significant contributor to the problems leading to the Minister’s announcement on 18 June. Hopefully, in the words of the Minister of Finance, we will find people of ‘the calibre, reputation, experience and expertise to lead the reform outlined’. I wrote short Q&A on this issue available at http://www.complianceireland.com/Newsletter.html (choose Newsletter 3/2009) and followed up with an interview on Newstalk this morning at http://www.complianceireland.com/Press.html (file dated 20/02/2009) (it is a big download file). May be this group can come up with a list of suitable names in Ireland and abroad for the top roles at the new regulator. We can post them (unless they disagree) and hopefully by doing so in a transparent way, the public will be confident that whatever choices are made (wrong or right) we all had our say on matters of national and economic strategic importance. Peter Oakes Comments are closed.