Elderfield Speech on Financial Regulation

If the CB reckon that a target core tier 1 ratio is a sufficient condition to “get credit flowing again” they will be sadly mistaken. Increasing the equity capital ratio up to say the fortress level that obtains in the UK or Sweden, either by nationalisation or by some other private sector solution is not guaranteed to satisfy the providers of liquidity and non equity capital. They are going to obsess about the 2nd wave of credit losses and likely ration supplies until they see definitive signs of economic stability. The conundrum is how will you steady the economy without access to credit.

@Karl Whelan
There is no break with the past – just a change of strategy by the establishment. The NAMA/Irish banking cover up continues with billions more (on top of the €14Bn already) to be given to Anglo/Nationwide. All this so the establishment can keep the truth from coming out and protect the wealth of its members. “Getting credit flowing” and “fixing the banking system” were and are giant deceptions to justify this massive cover up & massive theft.

The unedited version

The devastating impact of the global financial crisis on Ireland’s economy, finance and citizens is well known to you, and I will not use this occasion to analyse (or even acknowledge) the (specific) cause(s which were mainly of course related to old fashioned cronyism, institutional capture and property speculation)…

We need to move beyond the debate on rules versus principles-based regulation, where it’s clear that (the principle has been that rules are for little people. If I may say so, the regulatory environment has been a bit Irish, and not just here in Ireland. I can see why people are proposing extreme measures but steady on)

Assessments must involve better assessment of business risks- the front office of a firm- as well as the traditional regulatory assessment of control risks –the middle or back office ( Sovereign risk is strictly front office, but it’s not our bag, so do keep an eye on the spread over German bunds when the NAMA payments kick in)

A systemically important bank should expect a much more intrusive approach than a fund or wholesale insurance company with a lower risk profile. (Your systemically important banks are well on the way towards nationalisation, so we will be intruding on ourselves unless we start working for the ECB)

We don’t need to become an enforcement-led regulator who shoots first and asks questions later. (the fighting Irish thing is so yesterday). But both financial firms and those that lead them need to be held much more accountable for their actions than has happened in the past, and be subject to tougher sanctions (or at least some sort of sanctions). However it is clear that it will take some time (ages) to bring this new approach on line, (so relax . As we say in the world of financial regulation, act in haste and repent at leisure)

Ireland is competing as a premier financial services centre (Croke Park and Aviva all in one, but your own banks have committed hara kiri. The surviving rump will amount, at most, to some sort of regional utility, so they will be playing in provincial venues)

The recapitalistion exercise will help to draw a line under the (part of your) banking crisis (which impacts internationally) and will therefore help to get credit flowing again (mainly to the financial service export sector). It is not (entirely) for the benefit of the (Irish) banks or their (truly Irish) management but is an essential step for the recovery of (global financial) businesses and Irish (FDI connected) households by improving confidence (of the global financial services industry) in the economy (or at least in the IFSC concept).

And just like the actions that have been taken to control the budget have created clear blue water between Ireland and some other euro zone countries, taking decisive action on the banking recapitalisation will improve our international standing in the financial markets. (Lets face it. You cann’t even give away your banks without a serious facelift)

But like many banks internationally, it will take some time to rebalance the funding profile between retail and wholesale sources and to exit funding support measures. Appropriate transitional arrangements (probably involving a significant but disguised dilution of your national sovereignty) will therefore be needed before the new liquidity framework comes into force (Don’t worry. You can still keep the green jerseys).

Our strategy for banking regulation will include measures aimed to prevent future excesses of concentrated lending against individual (local) sectors by developing tougher standards for concentrated (Irish) exposures. (In other words, we are looking at Volvo Ocean Races not Galway Races going forward)

The agenda – a prudent (basic life support) recapitalisation exercise, implementation of international standards, tougher requirements on credit concentrations and improvements to governance standards – adds up to a stronger banking sector and therefore a stronger economy (or rather a stronger financial services component of whatever economy survives here for you guys).

I am keen to see firms move quickly to clear backlogs in handling overcharging cases. (As your banks are on the ropes, and overseas competition is disappearing fast, I’m afraid overcharging is the new charging)

We are contributing to the recently formed government working group to help develop other solutions to alleviate the arrears (of integrity and accountability) problem. (As the Russians liked to say, the situation is hopeless but not serious).

.

An hypothetical: a deal maker backed by banking funds but making money investing funds for insurance companies etc, decides that an untapped market exists in Ireland, (among others!) and to ensure good commissions for the next few years, they go about convincing some banks to take on more funds. This takes a few perquisites, even sums deposited in offshore banks, to enable the relevant person within each bank to approve these deals.

Everyone makes out like bandits but then things change…. as we know. Now the question of repayment of bonds and other secured and preferred lendings arises, in the context of normal business. It turns out that the sums paid to ensure their business is taken on are now disclosed to the deal maker and bad news is given to the bond holders: there will only be a very small repayment as the borrowing institution considers that the perqs are in fact unlawful and throw the entire deal in doubt now that so m uch of the lending made with that money is sour.
the bank alleges that the hidden deals should have been disclosed to it.

Regulator
Sounds terrific, but isn’t the horse already gone? Banks are now reducing lending? As fast as possible.

company law also needs updating (the last piece of major legislation being the Companies Act, 1990)

we have had the bones of a bill to consolidate company law, prepared by the CLRG at least 4 years ago, with the appropriate government agency for sign off etc

so when politicans bleat on about corporance governance it makes me wince- they should get on with the work they have in hand and update company law

it is a necessary plank to go hand in hand with other corporate regulation

IMO, and ignoring how we got here and whether culture can change without catharsis, Elderfield seems like a man not to be messed with. A Federal Marshal rather than a locally elected Sheriff.

Maybe I’m wrong but it appears that Elderfield is concerned with the quantum of credit. Is that not the job of the Central Bank?

I would prefer it if the regulator restricted himself to ensuring that whenever credit flows it’s flow is regulated. Where the policy objective is to “get credit flowing” the must be a danger that this would conflict with prudence. Have we not been here before?

“ The recapitalisation exercise will help draw a line under the banking crisis and therefore help get credit flowing again. It is not for the benefit of the banks or their management but is an essential step for the recovery of the finances of Irish businesses and Irish households by improving confidence in the economy.

Another concern is,

“ What is needed to make this new approach work? Ireland is competing as a premier financial services centre.”

Of itself there is nothing wrong with this. But I do wonder to what extent the Irish State has liability for failure in the regulation of IFSC authorised institutions.

Will we find, at some future date, that we are being sued for failing to properly regulate a Zimbabwean hedge fund?

@ Michael Hennigan – Finfacts

“Lehman’s Repo 105”.

Now that’s how to dress a balance sheet.

Are we really confident that “Ireland” can regulate the offshore activities of these institutions.

We would need 10,000 regulators.

http://www.zerohedge.com/article/lehmans-repo-105-counterparties-barclays-mizuho-ubs-deustche-bank-and-kbc-may-have-attempted

“Then-Chief Executive Officer Richard Fuld was “at least grossly negligent” for letting Lehman file financial reports in which a key gauge of strength was “reverse-engineered” through transactions known as Repo 105s , bankruptcy examiner Anton Valukas said in a report yesterday. Lehman auditor Ernst & Young LLP could be accused of “professional malpractice,” he said.”

The balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman’s net leverage ratio” and caused financial reports to be misleading, Valukas wrote of the New York-based company. Higher leverage undermines a firm’s capacity to absorb financial shock.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aGeWL3bkusWQ&pos=3

“a key gauge of strength was “reverse-engineered””

I wonder will that expression become common jargon in media, political or legal circles in Ireland.

@David O’Donnell
The Irish establishment have 88 years experience of adapting to new circumstances while remaining fundamentally collusive, corrupt, secretive and cronyist. The structures change but those in power remain the same and act the same.

@Michael Hennigan
The big 4 need to be broken up. Dramatic reform is required of accounting standards and audit practices for big institutions.

@Greg
The establishment’s new wheeze is to strictly regulate the retail banks but have a free for all in the IFSC, including I would guess after a lull, in the retail banks IFSC subsidiaries. It will all end in tears. Even letting AIB et al have ANY continued involvement in financial gambling is insane.

@Greg
There will be (another) crisis in the IFSC (it happened already with DEPFA). If the pattern with the banks is followed no one will talk about possible problems in the years before – except a few dissidents. Then a blanket guarantee will be issued to the IFSC institutions and a cover story about a dramatic night cooked up….and we will be on the hook again. When the next crisis comes we’ll be Iceland but in the Euro. Gordon Browne’s successors will blacklist us and the Dutch, Germans, Americans etc will join in. Worse still, McDonalds will leave!

Giving the Irish establishment a financial services centre is like giving a chain of petrol stations to a gang of pyromaniacs.

@Nigel
The truth about Anglo/Nationwide/AIB and its eventual cost is being deliberately covered up. The Irish establishment’s POLICY is to cover up scandals. The bigger the scandal, the more money and effort they will expend to do so. The shocking thing would be if they told the full truth. An investigation that began a year ago into a massively corrupt, reckless institution that has now started going BACKWARDS? Only in Ireland.

This article from 4 months noted that:
“We were promised five inquiries into the reasons for the Anglo collapse and the pursuit of any wrong doing internally. Those bodies were: the ODEC (Office of Director of Corporate Enforcement); the ISEQ (Irish Stock Exchange); The Garda Fraud Squad; CARB (Chartered Accountants Regulatory Board and the Financial Regulator. Their focus was to probe breaches of company law, banking regulations, fiduciary responsibilities to shareholders, the role of Ernst and Young as auditors and any infringement of statute law.

What has happened since? No findings have been made. No charges preferred. Not even a file sent to the Director of Public Prosecutions. This is intolerable. The credibility of these investigations has to be questioned. The prima facia evidence is overwhelming and straightforward.”

http://www.irishexaminer.com/opinion/columnists/ivan-yates/lack-of-accountability-is-the-real-scandal-in-anglo-irish-fiasco-104846.html#ixzz0i0718bZW

We may get a few prosecutions but the full truth in a timely manner? Never, not with our establishment. They may tell us something in 9 months, probably later. Frank Fahey will then do his best on the Dail committee and Lenihan, Cowen and Eamon Ryan in the full Dail debate to turn the whole thing into a mud wrestling match.

Our system of governance is utterly broken.

@ yoganmahew

True 🙂

On the Tobin tax. I think the EU or World Bank have first dibs.

But I am thinking of a situation analagous to Icesave.

The Icelandic people knew nothing until the SHTF.

Are we on risk for IFSC. 😯

@ yoganmahew,

But is that not because Hypo acquired Depfa six months or so before implosion?

However, if the parent regulator is responsibile that’s all the better.

Having said that there must be “independent” operations.

I hope the regulator is up to the task.

@ yoganmahew

I see what you mean. We are not on risk for senior creditors of IFSC operators (like bondolders?)

One simple change in the law would then have avoided all this mess.

Deposits to rank above all capital (including bonds senior, junior, dated or whatever you having).

@ Karl,

Wasn’t that behaviour at Lemhan Brothers just disgraceful.

I was shocked. Shocked I tell you.

Surely the first thing to take from this speech is that it is a massive signal of intent emanating from a generally inward looking regulator given its history. That is the subjective view. In Ireland we greet Elderfield’s comments as a grand statement – that is sad indictment of how poor we have been. An objective view is that every other intelligent country announced the same years ago. But Elderfield’s predecessors were obviously incapable of stating the obvious and so to us the speech seems ground-breaking.

What this speech tells us, thankfully, is that Elderfield has a vision, purpose of mission and a strategy. This is something that the previous CEOs of the Financial Regulator and Governor of Central Bank could never articulate in one meaningful sentence. I cringe when I recall those moments on RTE when the previous Governor and Financial Regulator continually put their feet into their respective mouths. To think that international commentators saw these people as being the best of Irish breed is soul destroying.

In terms of comments about capitalisation, it is of course the Financial Regulator’s role to be in that space. The new structure of regulation in Ireland is a unitary central bank and regulator. Even in a country like the UK where the central bank and the financial regulator are split (at least for the time being) Hector Sants (FSA CEO) has a significant role in respect of recapitalisation (or nationalisation) of the likes Northern Rock and RBS. That is extraordinary for a country which is not part of a monetary union. No disrespect to the Central Bank of Ireland, but it cannot: (a) control money supply; (b) decide upon open market operations; and (c) set interest rates. On paper there is not a lot on its plate in terms of a job description. It just so happens that a small part of its job description, that of domestic financial stability, has exploded and kept it busy. In this melting pot the Irish financial regulator is a major contributor to policy in terms of recapitialisation and credit both received from the wholesale markets and that delivered to the end user.

On the point of securities regulation raised by Donal Byard, we have to note that Irieland does not have a primary securities market in the same manner as the US, UK, France and Germany. Securities law in Ireland is the same as that for the rest of Europe (see the EU directives in this regard -Transparency, Prospectus, Market Abuse and MiFID to name but a few), but no-one lists in Ireland to gain international traction unless they are a mutual fund which only does so to allow investment managers to comply with mandates which require investing in securities listed on OECD markets (effectively they substitute the purchase of trading listed companies for listed mutual funds, many of which are domiciled overseas). It is for that reason and not an absence of regulatory appetite that we don’t have a significant operational securities regulation. Securities regulation operates at both a macro and micro level – Ireland has the macro obligations for sure, but our markets function at the micro level.

Elderfield’s speech is more than just about enforcement, assertive risk based approach, bank restructuring and recapitalisation. He clearly identifies Ireland’s unique opportunity to become a central hub in financial services not just for Europe but also globally. If Ireland and those who only concentrate on bank regulation pull their heads out of their navels they will see that, as Elderfield raised, we have a ripe opportunity to develop (or further develop) four financial industries (i) mutual funds industry – read UCITS IV; (ii) hedge Funds – read AIMFD; (iii) reinsurance/insurance – read Solvency II and (iv) Islamic Finance – see the Finance Bill. The Irish Times today refers to the Irish Funds Industry Association as stating “3,300 people out of the total 12,500 employed in the funds industry here are in the hedge-fund sector” (http://www.irishtimes.com/newspaper/finance/2010/0313/1224266194854.html). Are we all aware that once AIMFD is passed, US investment managers may not market and sell in Europe a fund that is domiciled outside of the EU? Given that there are potentially 300 million investors in Europe, surely this is to Ireland’s benefit and unfortunately a loss to the Cayman Island, BVI and Bermuda. Two offshore law firms with funds companies have already seen the future and have entered the Irish market so that they don’t lose their share of hedge fund business. Another foreign law firm is entering Ireland too. They must think that Ireland is a good bet. Effectively you could double (or triple) the number of 3,300 people being employed in Ireland in hedge funds. You could double the number of existing service providers to these funds too. The economists in this group can explain the benefit the Irish economy shall derive from the multiplier effect as the employees spend their salaries in a small economy like Ireland. UCITS IV will provide similar benefits although perhaps not to same the magnitude – and the government has amended law to allow for ease of redomiciling of these funds. We also have Solvency II. If Ireland plays the game properly we will become a centre of insurance/reinsurance excellence (and I appreciate the GenRe / Cologne Re debacle of a few years ago). Elderfield was at the heart of this sector when he ran the Bermuda regulator. We have already seen reinsurers and insurers change domicile to Ireland in the past 18 months. They are employing and are developing a significant presence in Ireland.

Another opportunity for Ireland, arising from the Finance Bill, is the proposed new tax and regulatory regime for Islamic Finance. The assets of Islamic banks are expected to grow at a rate of 24% per annum to $ 1.85 trillion by 2013. If Ireland doesn’t want a share of this market, then Malaysia will happily clean up. We have a solid funds industry in Ireland and it can be easily adapted to support Islamic Funds and Sukuk (bonds). [A disclosure here – I am a NED of an investment company which manages an Islamic Fund].

The above are areas for competent regulators to not simply monitor once they exist, but rather take a leading stance to ensure Ireland creates a forward looking regulatory environment to capture this new business as well as fostering (hopefully) well regulated activity.

Irish banks have done tremendous damage to Ireland’s other financial industries. Not only are the banks draining other industries of vital capital in the form of government investment but we are spending so much time and intelligence fixing historic errors we are likely to miss out on new opportunities. I truly hope Elderfierld gets the resources he wants so that half of them can regulate and deliver enforcement on past despots and the other half can ensure that future regulation doesn’t hamstring new industries. In a small economy like Ireland, it is completely feasible to see a time when our domestic banks play second fiddle to a larger IFSC presence.

If we as a country, and we as a group of professionals, dedicate as much time to enhancing the architecture for the above industries as we do dissecting the bank crisis we should achieve the right mix of financial services that a country like Ireland can benefit from. I hope one day that in terms of regulation that banks, albeit remaining systemically important, no longer have the respect they currently enjoy in the minds of the public. It might sound laughable, but one day mum and dad may be prouder of young Conor or Niamh who manage pension funds, are experts in Shariah Law or cede insurance risk than they are of them working at an indigenous Irish bank.

More on Elderfield’s speech including our press release at http://www.complianceireland.com/Newsletter.html#Elderfield_First_Speech_20100312 and http://www.complianceireland.com/Press.html

@ Peter Oakes
Thanks for your detailed and expert contribution from which the following points seem most pertinent:
‘ In Ireland we greet Elderfield’s comments as a grand statement – that is sad indictment of how poor we have been. An objective view is that every other intelligent country announced the same years ago.

What this speech tells us, thankfully, is that Elderfield has a vision, purpose of mission and a strategy.

The Irish financial regulator is a major contributor to policy in terms of recapitialisation and credit both received from the wholesale markets and that delivered to the end user.

Elderfield…….clearly identifies Ireland’s unique opportunity to become a central hub in financial services not just for Europe but also globally.
….once AIMFD is passed, US investment managers may not market and sell in Europe a fund that is domiciled outside of the EU.

Effectively you could double (or triple) the number of 3,300 people being employed in Ireland in hedge funds. You could double the number of existing service providers to these funds too. The economists in this group can explain the benefit the Irish economy shall derive from the multiplier effect as the employees spend their salaries in a small economy like Ireland.

We have already seen reinsurers and insurers change domicile to Ireland in the past 18 months. They are employing and are developing a significant presence in Ireland.

The above are areas for competent regulators to ……..take a leading stance to ensure Ireland creates a forward looking regulatory environment to capture this new business as well as fostering (hopefully) well regulated activity.

In a small economy like Ireland, it is completely feasible to see a time when our domestic banks play second fiddle to a larger IFSC presence.’

End quotes

I refer to my earlier contribution. It seems to me that you have confirmed the rather satirical message in the clearest possible manner. The IFSC is a bridgehead into Europe with prospects as a centre for regulatory arbitrage, provided it is clearly understood that the game is for big boys only.
The future of Main St Ireland, and of its crippled banks, is pretty bleak in your scenario. Notwithstanding the multiplier effect of a few thousand new IFSC jobs, a question surely arises as to whether such a development is genuinely in the national, or even European interest. It is certainly difficult to admire the ongoing shenanigans in the US financial service sector.

http://www.nakedcapitalism.com/2009/10/guest-post-the-empire-strikes-back.html

@ Peter Oakes

“But Elderfield’s predecessors were obviously incapable of stating the obvious and so to us the speech seems ground-breaking.”

Feel free to speak for yourself.

@ Greg – “Still, you are “Compliance Ireland”. You know what you’re talking about”. You might want to see my background on my website re your pearl of wisdom. I don’t draw conclusions based upon the ‘cover of a book’. Still my Sunday morning would not have been as entertaining had I not stumbled across your informed comments.

@All – one of my points is that we continue to talk down Ireland – and this might be right when examining the issue of banks historically and indeed whatever your views are on NAMA. But this thread was supposed to be about what the new regulator said and what it means from Ireland. I was simply expressing a view that Ireland has more to offer in terms of financial services than simply main street banking.

@ Paul Quigley “The future of Main St Ireland, and of its crippled banks, is pretty bleak in your scenario.” In fact my view is not bleak, rather my view is that Irish banks stepped aside their remit – they thought they were part of the big game and got taught a very tough lesson (which is affecting everyone). Therefore we need to ensure it does not happen again. High Street banking is not dead – did you see the results for credit unions in 2009 (and not individual cases)? They provide an alternative in terms of high street banking. There is a great opportunity to re-build the banking model in Ireland. The unfortunate thing is that lots of innocent people have been hurt and they need redress either directly (in the form compensation) or indirectly (in the form of collective redress).

“Notwithstanding the multiplier effect of a few thousand new IFSC jobs, a question surely arises as to whether such a development is genuinely in the national, or even European interest.” I appreciate your point. However I am yet to see any examples where a member state did anything benevolent for the EU – we seem to forget the word ‘union’ in EU.

“It is certainly difficult to admire the ongoing shenanigans in the US financial service sector.” – You are absolutely right, so we need to fix it. The story about Lehman brothers and how the UK banks may have been involved in cherry picking is outrageous. So too are stories circulating that Wall Street banks helped hide Greece’s problems by the use of CDSs.

Does anyone know where the figures for daily non-retail banking transactions within Ireland and between the Irish financial sector and the rest of the world can be found online? I need stats and financial value.