Category: Regulation

Restoring Confidence in the Financial System

Fiona Muldoon, Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, gave a speech yesterday in Glenties at the MacGill summer school (h/t John Gallaher). The topic of the speech was “Restoring Confidence in the Irish Financial System.” Ms Muldoon gave a fairly upbeat assessment of progress. I am less sanguine. The problem is not lack of international confidence in Irish banks and businesses, but rather lack of international confidence in Irish financial regulation. It is still not clear if the Irish Central Bank has the backbone for the tough tasks it faces in the current environment.

It is important to remember that the weak regulatory stance of the Irish Central Bank during the credit bubble period was one of the chief causes of the Irish economic crisis. The Irish Central Bank’s soft and timid approach, and its willingness to be swayed by political and business interests, was a major cause of Ireland’s economic disaster (for evidence, see my paper with Brian O’Kelly). Has the Irish Central Bank sufficiently altered its approach?

The Irish Central Bank has reformed enough so that if the challenges of 2002-2008 ever reoccur, it will be ready for them. This new resolve to block credit bubbles is not likely to be tested for many decades. The Irish Central Bank needs to have the strength and fortitude to deal with the very different challenges of 2013.

The Irish Central Bank showed no leadership during the fiasco of the 2009 Land Reform Act/Dunne Judgement. The previous government (perhaps deliberately) slashed a gaping hole in Irish financial contract law when it passed the flawed 2009 Land Reform Act. The flaw was pointed out by Justice Dunne, and the judiciary reasonably expected that such an egregious flaw (called a “lacuna” in legal parlance) would be fixed by amending legislation. However the legal flaw was politically convenient since enforcing mortgage contracts would have been politically painful at the time. Ignoring the Dunne Judgement and leaving the flaw in place was very poor practice in terms of restoring international confidence in the Irish financial system, but it was politically convenient for a domestic audience. The government did nothing at all about this legal flaw, despite the obvious impact on Ireland’s international reputation.

It took outside interference by the Troika to get this legal flaw fixed. The Troika repeatedly noted the unacceptable situation in their quarterly reviews, and when government action was still not taken the Troika demanded that the Irish government act by an imposed deadline or face a cut-off in national debt funding. Throughout this long, confidence-draining saga, the Irish Central Bank stood meekly by and said nothing. A stronger-willed central bank (US, UK, Germany, others) would have been screaming from the rooftops about the need to fix such a gaping hole in the country’s financial contracting law.  It is not to the credit of the Irish Central Bank that we needed Troika intervention to get this problem acknowledged and fixed.

The Central Bank’s response, or lack thereof, to the explosive growth in mortgage arrears is another case where its stance was timid. Even by late 2011 it was obvious to hard-headed observers that some substantial fraction of the mortgage arrears explosion could be traced to strategic behaviour by households. Mentioning strategic default is offensive to many people since it means acknowledging that some Irish people are acting dishonestly in their own self-interest against the interests of society. A few people were brave enough to mention the obvious (take a bow, Karl Deeter!) but none at the Irish Central Bank. Up until early 2013, the Irish Central Bank effectively had a ban on any mention of strategic default by any central bank spokesperson. This gave rise to some stilted presentations, where Central Bank senior spokespeople railed about the explosion in mortgage arrears without any mention of one of the key causal factors. This omerta was finally broken by Patrick Honohan in early 2013. That was too late in the process to be an international confidence-booster. A strong imperative by the Irish Central Bank not to cause anyone any offence is not a good foundation for building international confidence in Irish financial regulation.

On the positive side, the Irish Central Bank’s actions against Quinn Insurance were tough and bold. So the bottom line is that in terms of restoring confidence the Irish Central Bank has a mixed record over recent years.

Irish Times on Mortgage Arrears Deals

An interesting article on property debt restructuring deals by Mark Hilliard in today’s Irish Times, “Secret Deals on Mortgage Arrears Raise Concerns.” For many of us it will bring back our graduate school days studying Stiglitz, Rothschild, Ackerlof, Spence et alia on information revelation and efficient contracts. The laudable goal of the Irish mortgage debt arrears policy is to ensure that almost all householders who cannot pay their mortgages can keep their family homes. The difficulty is that it is virtually impossible to distinguish can’t-pays from won’t-pays except at untenable cost and personal privacy intrusion. So the unwritten “policy” is to restrict the flow of information to consumers regarding restructuring terms and conditions. This is intended to limit the flow of potential won’t –pays into the system. In the article, Noeline Blackwell of FLAC is quoted lamenting the lack of a clear detailed list available to consumers in terms of debt restructuring options. She is correct, but this lack of information is not a bug, it is a feature of the evolving Irish system.

Swords v DCENR

The case of Pat Swords versus the Department of Energy etc continues. See here and here for its history. The media is strangely quiet. At stake is an injunction to halt the National Renewable Energy Action Plan (NREAP), but this case has ramifications for all relations between the rulers and the ruled, and for Ireland’ sovereignty.

There have been two sessions of the High Court, one on April 12 and one of April 16.

State argued that the case should be thrown out because the Aarhus Convention does not apply as it had not been ratified at the time the NREAP was accepted by the European Commission in 2010. This argument was rejected. Even though Ireland did not ratify the Aarhus Convention until 2012, the European Union had ratified it in 2005. Therefore, Ireland must comply with Aarhus.

Read that again: Ireland is subject to an international treaty it did not ratify.

The session is adjourned till June. State now has to engage substantively with the ruling of the Aarhus Compliance Committee, which has that Ireland failed to properly inform its citizens about NREAP and its impact and did not allow them sufficient time to engage with policy making.

Ireland v Pat Swords

It has been several years since I first came across Pat Swords. Pat demanded access to wind energy modeling work that he thought the ESRI had done but not published. There were many layers to our reply. The ESRI is not covered by Freedom of Information legislation. At the time, Ireland had not yet ratified the Aarhus Convention on Access to Environmental Information, so that did not apply either (but see below). Although it would have been appropriate for the ESRI to do a detailed study of the pros and cons of subsidizing wind energy, we had not. And no, we were not aware of someone else having done such a study either. There is no ex ante evaluation of wind energy subsidies in Ireland, and no ex post evaluation either. (And lest people protest, I am aware of a number of partial studies, and a number of not-independent ones.)

Pat lost interest in the ESRI, but not in wind policy. He asked every institution in Ireland he could think of “why do we subsidize wind?” Some replied in the vein of “because we do, now go away”. Others did not respond. So Pat asked the European Commission, with the same result. Although we do generously subsidize wind power, no official was able to satisfactorily answer why.

So Pat went to the United Nations. It first ruled that, because the European Union has ratified the Aarhus Convention and because wind policy is dictated by Brussels, Ireland’s wind policy is bound by the Aarhus Convention – a treaty Ireland had not ratified at the time.

The Aarhus Convention is not at all about wind. It is about public policy. The Aarhus Compliance Committee ruled that Ireland had failed to give its residents a proper say in the National Renewable Energy Action Plan (NREAP). Two failures were identified. First, there was insufficient information to inform a reasoned decision. Second, there was insufficient time given to deliberate and, if need be, protest.

The Committee did not say whether wind power is good or bad. It did say that decisions on wind power are dodgy.

This is a remarkable result in and of itself. The Irish government cannot justify policy decisions with a few half-baked arguments and ram it through the Dail. It often does, but there is now a precedent to call an end to such practice.

The story does not end here. Pat took the UN ruling to the High Court and asked for a judicial review of the NREAP. The judge agreed that there is prima facie evidence that things are not kosher and called a hearing, which is due to reconvene on March 13.

The government’s defense is that Pat’s protest comes far too late, ignoring that all his earlier protests were put aside and ignoring the UN ruling that insufficient time was granted in the first place. The government also argues that the EU has accepted the NREAP, ignoring that the UN ruled that the European Commission was just as much in the wrong as the Irish government.

Inexcusably, the government asked the court to be granted legal costs if they win. If he loses, Pat may have to pay the government’s lawyers.

Such bullying tactics may soon come to an end through another lawsuit, but they have not yet. It is immoral, though, that the mighty government seeks to throttle a judicial review by threatening to bankrupt a citizen who exercises his democratic right.

The government’s behaviour suggests that it knows it cannot defend its case for subsidies for wind power. Carbon dioxide emissions from power generation are indeed already adequately regulated by the EU Emissions Trading System. There is no reason to put subsidies on top. Many Irish households and companies would probably welcome cheaper electricity.

Pat comments on this case here.

Paul Hunt on rent-seeking and regulation in gas and power

Paul’s talk at the DEW in Galway is now available. It is worth a read for all interested in energy markets, and for all who argue, wrongly, that regulatory reform is not a priority for stimulating economic growth.

Paul got limited coverage in the media: Independent; Times