Matthew Elderfield, Head of Financial Regulation, Irish Central Bank, is reforming a failed system.

The Minister for Finance today welcomed the report of the Comptroller and Auditor General (C&AG) on the role of the Irish Financial Regulator in responding to the financial market crisis which is being laid before the Oireachtas on Monday 22 March 2010. Shortcomings in regulations were identified but given the scale of the banking crash, it's a polite form of words for monumental negligence and incompetence.

In response to the report the Minister for Finance, Brian Lenihan T.D. said:  “I will publish a Bill later this week to reform the Central Bank and Financial Services Authority of Ireland. This is the first of a three stage legislative programme to create a new fully-integrated structure for financial regulation, enhance the powers and functions of the Central Bank and consolidate existing legislation.

The financial regulatory reforms will address the problems identified by the Comptroller and Auditor General and respond as appropriate to his recommendations. This is an important element in a comprehensive programme to put in place a domestic regulatory framework for financial services that meets Government objectives for the maintenance of the stability of the financial system, provides for the effective and efficient supervision of financial institutions and markets and safeguards the interests of consumers and investors.”

The C&AG reports to the Dáil and the report was completed on 22 December 2009 - - exactly three months ago - - and is now ready for public airing.  

The main findings of the Report include the following:

• There were shortcomings in the regulation of financial institutions in Ireland, the EU and further afield. The Financial Regulator has begun a process of intensifying supervision, speeding up information flows and addressing internal communications.
• Considerable work remains in order to ensure that future shocks can be effectively addressed by “fit for purpose” crisis management characterised at international level by coordination rather than competition.
• In order to make financial regulation more accountable, the Financial Regulator might be required to give an annual statement relating to supervisory matters to Dáil Éireann.
• An annual positive assurance might be given by auditors in regard to the functioning of the internal corporate governance regime in each financial institution including the risk management function.
• The Financial Regulator should consider incorporating into the systems, procedures and practices of his inspection work, a greater emphasis on testing of transactions and balances, balanced with a top-down analysis of the sustainability of the business models and associated strategies of individual institutions.
• The report suggests internal review by the Central Bank and Financial Services Authority and the Department of Finance to record the knowledge gained in the course of the financial crisis and identify any lessons learned for policy determination.

The report notes that a more intensive form of financial regulation has now been put in place for covered institutions and is required for other institutions.

Special Report 72: Financial Regulator

Special Report 72: Financial Regulator Summary of Findings

• The report says there were failures in the assessment of risk, both by credit institutions and by those who regulated and supervised them. This led to a corresponding underestimation of the capital that credit institutions should hold.
• The checks and balances of corporate governance also failed. Many boards and senior managements of credit institutions seriously underestimated the risks they were running. Remuneration and incentive schemes within financial institutions contributed to excessive risk taking by rewarding short term expansion rather than long term profitability.
• The Regulator acknowledged that, in retrospect, it was clear that the actions it took were insufficient and were not taken early enough. It took what it considered to be proportionate actions to mitigate the risks in the system. Clearly this was not enough as the scale and rapidity of the crisis (which was exacerbated by events such as the Lehman’s collapse) greatly exceeded forecasts.

SEE also Finfacts article, May 2009: Irish Financial Regulator’s failure to control property bubble contributed to economic crash and consumer wealth losses

"Irish banks are resilient and have good shock absorption capacity to cope with the current situation" - - Patrick Neary, Chief Executive, Irish Financial Regulator,  September 19, 2008: - two days after the collapse of US investment bank Lehman Brothers.