The Governor of the Irish Central Bank, Patrick Honohan, has said he is determined "that there will be a renewed emphasis on enforcement, even at the risk of the regulator incurring legal costs in unsuccessful actions." He said “ignorance and inattention” were at the heart of regulatory failure. Meanwhile, the group that represents firms at the IFSC - - Dublin's International Financial Services Centre - - warned that income tax hikes in next week's Budget will cause job losses. Dr. Honohan was speaking last night at the annual dinner of Financial Services Ireland (FSI), a group within employers' body IBEC, that represents the Irish financial services industry. The governor said that Irish bank regulation fell into this trap.
|Irish Central Bank Governor, Dr. Patrick Honohan. He was a professor of economics at Trinity College, Dublin, until his appointment in Sept 2009.|
The business of "our banks was not particularly complex and could have been adequately supervised in the former style. But the old procedures fell into disuse in favour of the new approach which was, I am afraid, being applied rather formulaically by both banks and Regulator. I suspect that the banks made their risk decisions largely independently of the mechanical models and procedures peddled by Basel 2-compliant consultants. The Regulator lost sight of the details of the banks’ portfolios, did not scrutinise the quality and extent of collaterals and guarantees that had been given by the big borrowers (information that could not have been available to outside commentators), and ultimately failed to question the robustness of the business models. Accordingly the supervisors were no longer really in a position to challenge the banks’ complacent view of the security underlying the property loans they were making and of the threat to their survival." Honohan said that the risk of losing a court case taken in good faith, where the Regulator’s legal powers prove insufficient to prevent socially harmful risk-taking behaviour by a financial firm, is one he is prepared to take - - always ensuring of course that due process is followed.
"I am confident that, if existing legal powers do prove inadequate in such cases, legislative amendments will be forthcoming," he said. The governor also said that emphasis on enforcement also extends to consumer protection.
"I reject the notion that an unwarranted focus on consumer information and consumer protection played a part in the failure of prudential regulation," he said. "Achievements in the consumer area over the past number of years have been widely praised - - and I would include in this the work of the Financial Ombudsman and MABS. There is no question of dismantling consumer protection because of a perception that mis-selling was not at the heart of the current crisis in Irish finance," he added.
SEE: Finfacts article, May 26, 2009: Irish Financial Regulator’s failure to control property bubble contributed to economic crash and consumer wealth losses
Brendan Kelly, director of FSI urged the Minister for Finance Brian Lenihan not to increase income taxes in next week’s Budget.
“Over the last 18 months, the marginal rate of tax has increased from less than 44% to over 52%, and there is a real fear that it could rise to 58% in 2010. While we can all understand why some people may advocate this, we shouldn’t pretend that it is good economics,”said Kelly.
“Firstly, as a way of raising revenue – it just doesn’t work. Despite the significant increase in PRSI, income tax rates, and the introduction of income levies the actual amount of money collected in income tax is in freefall. In 2007 the State collected €13.6bn in income tax, and despite significantly increasing rates, IBEC forecasts that this figure will fall to €11.6bn this year.
“Second, it has a very damaging impact on the ability of Ireland to compete internationally. FSI’s members in the IFSC are seeing this first hand as they struggle to attract and retain international talent.
“The Government has acknowledged that our economic recovery depends on the performance of our export sectors. In particular, financial services, business services, software and high-value manufacturing in ICT, pharma, and med-tech are crucial for job creation and tax revenue. Ireland will not experience an economic recovery unless these sectors experience substantial growth.
“These sectors are entirely dependant on skilled labour that can locate anywhere in the world. It is not unusual in the IFSC for one or two highly skilled asset managers, risk managers, or fund managers to be the anchor that keeps a team of 40-50 people in Dublin. If he or she decides to leave – the rest go too. Increasingly, penal tax rates are making Ireland an unattractive location for these key people.
“There is a real risk that tax hikes will spark an exodus of talent at the very time that the Government is trying to promote a Smart Economy. Neither foreign executives, nor highly skilled Irish workers and entrepreneurs will hang around to pay ever higher taxes. The companies, both foreign and domestic, that rely on them will not be far behind.
"If the Minister increases tax rates, it will lead to job losses," concluded Kelly.