Matthew Elderfield, Head of Financial Regulation, Irish Central Bank

The Financial Regulator Matthew Elderfield told Joint Committee on Economic Regulatory Affairs today that new exacting standards  for directors of banks and insurers will be proposed. He also said more mortgage rate hikes are likely and a rapid wind-up of Anglo Irish Bank would be "prohibitively expensive."

The regulator said he could not discuss the situation of Quinn Insurance in more detail because of the pending High Court case and ongoing sensitive discussions with various parties, but he said: "we are faced with a serious and persistent breach of the solvency requirements of a major insurance company and that we are determined to take action to protect the interests of its policyholders. I would be very glad to return to the Committee to discuss this issue in the future when matters are more settled. Thank you for your understanding on this matter."

The regulator said it is important to be frank and acknowledge that the coming months are likely to see a continuation of the process of the banks re-pricing their mortgage books. Elderfield said Ireland had very low mortgage rates in the recent past but that era is now clearly ending. Part of the reason for such favourable rates was that the banks’ business models were,"as we now know, fundamentally flawed, chasing unsustainable profits through risky property and development lending, profits which effectively subsidised aggressive campaigns for mortgage market share and unsustainably low interest rates. That skewed business model now needs to be fundamentally re-calibrated - - and at a time when banks’ costs of funding are significantly higher. Interest rate increases for borrowers are an unfortunate but inevitable consequence of this new world."

The regulator said it is likely that the bulk of the Anglo that remains after NAMA will be transformed into an asset management company to manage the bad assets of the bank. A small new bank is likely to be carved out and it is on this entity."I know that there is a very strong debate about the best future for Anglo and whether some other alternative makes better sense. My own view is that the costs of a rapid wind up of the bank would be prohibitively expensive and that the structure that is being developed is a reasonable way to minimise the costs to the taxpayer."

Elderfield said in the next week or two the Central Bank will publish a consultation paper on new corporate governance standards for banks and insurance companies. He said it is clear that there have been serious failures of corporate governance at a number of financial institutions and that the regulatory standards in this area need to be reassessed. The planned proposals will set more exacting standards for Boards of Directors of banks and insurers, and will include requirements relating to Board composition and impose restrictions on the number of directorships that can be held at one time. He said recent history shows that many Boards need to raise their game. The new proposals will set a clearer standard for their performance. Breaches of the standards will be sanctionable under the administrative sanctions framework.