Business World and RTE are reporting on a new research note from JP Morgan that gives Ireland a vote of confidence by telling clients not to bet on the state defaulting on its debt. The note describes Ireland’s financial position as “remarkably strong” despite the banking crisis and economic downturn. On the issue of banks’ bad loans, the analysts at JP Morgan are pencilling in a worst-case scenario of €27bn in write-offs over the coming years. Not trivial, but certainly manageable.
Category: Banking Crisis
I’m afraid I must disagree with my distinguished colleague Eamonn Walsh’s arguments in today’s Irish Times about the Anglo 10 loans. Walsh argues that “to state in the Dáil or elsewhere that the Anglo 10 “were given” €450 million is patently incorrect” and that “The most likely outcome is a wealth transfer that was somewhat less than €40 million.”
Let’s recall the details here.
Today’s Irish Times contains a thoughtful and well-argued piece by Brendan Kelly of Financial Services Ireland, the group within Ibec that represents the international financial services sector. In the piece, Kelly notes that “the financial services industry warned the Financial Regulator about the risks of increasingly complex financial markets for many years” and that the Regulator’s consultative panel of industry representatives “warned the Financial Regulator’s office about the increasingly complex nature of international financial services” and also “highlighted the lack of financial services experience on the board of the Financial Regulator, and the need for a dedicated unit to anticipate the regulatory hazards caused by financial innovation.”
These are all good points and hopefully will be taken on board within the new structure. However, it is important to remember that the key regulatory failure in the Irish case did not involve complex financial instruments. Instead, regulators allowed banks to make loans to property developers on a scale that threatened their solvency once house prices started to decline.
We are pleased to bring you this guest post by Dr Jonathan Westrup of the IMI and author of the 2002 TCD Policy Institute Studies in Public Policy No. 10 Financial Services Regulation in Ireland – the Accountability Dimension .
” Further to Karl Whelan’s post, the government has clearly decided to radically reorganise the present unwieldy structure that, for the past 6 years, incorporated the financial regulator within the Central Bank.
Two features of the proposed reform immediately stand out. First, the decision to put responsibility for stability and supervision into one organisational structure rather than to have them divided between the Bank and the Regulator. Second, the decision to set up a presumably stand alone Financial Services Consumer Agency with responsibility for consumer protection incorporating the existing consumer directorate of the Regulator and the Office of the Financial Services Ombudsman.
What is intriguing is the Taoiseach’s reference in his speech to “international best practices similar to the Canadian model”. A quick look at the Canadian regulatory system, as Karl mentions, shows that a distinguishing feature of the model is that the Central Bank has never had a responsibility for regulation. Instead, since 1987, the Office of the Superintendent of Financial Institutions (OSFI) has regulated both the banking and insurance sectors while Canada remains the only major country without a securities regulator, with responsibility devolved to the individual provinces. In terms of a consumer protection mandate, the provincial securities regulators all have a responsibility while, since 2001, the Canadian government established the Financial Consumer Agency of Canada with a mandate “to strengthen oversight of consumer issues and to expand consumer education in the financial sector”. However, according to its website, it has a budget of only 8 million Canadian dollars.
So on the face of it, the relevant part of the Canadian model to which the Taoiseach refers, is the hiving-off of the consumer protection aspect of regulation.
There is little further detail at the moment of the new regulatory system but there are some very important questions. We are told that a new Head of Banking Regulation will be appointed, but how will insurance and securities regulation fit into the Commission? What will be the relationship between the Governor of the Central Bank and the Head of Banking Regulation, given the demands of the Maastricht Treaty in terms of determining the governor’s accountability towards the domestic political system? Will the present 50/50 funding arrangement between the industry and the Central Bank continue with the new model? What will be the powers of the new consumer agency outside the Banking Commission?
The government has clearly decided, yet again, not to set up a stand alone single financial regulator, but to go for a variant of the Twin Peaks model where all prudential regulation is the responsibility of the Central Bank and conduct of business regulation is regulated separately. However, in the Dutch case, which is the Twin Peaks exemplar, the conduct of business function is more comprehensive than appears to be the case with the proposed Financial Services Consumer Agency. With details so limited at this stage, this assumption may not be accurate.
Many governments are wrestling with reforms at the moment, with the UK’s Financial Services Authority promising “a revolution” in financial regulation in their proposed reforms due before the end of the month. The government has moved quickly but more detail is required before making assumptions about how the system might work. Given the fairly immediate need to hire the new head of banking regulation, questions about the model will presumably be clarified very quickly.”
In Saturday’s Ardfheis speech, the Taoiseach announced:
I will create a new central banking commission. This will incorporate both the responsibilities of the Central Bank and the supervision and regulatory functions of the Financial Regulator. This will build on best international practice similar to the Canadian model. And it will provide a seamless powerful organization with independent responsibility. It will have new powers for ensuring the financial health, stability and supervision of the banking and financial sector.
I interpreted this statement as implying that Canada has something called “a central banking commission” which incorporates both central banking and financial supervision. It turns out, however, that Canada does not have such a structure.