Saturday 3 December 2016

Our new watchdog's no-nonsense, take-no-prisoners reputation appears to be well earned

Published 03/04/2010 | 05:00

JUST three months into the job, new Financial Regulator Matthew Elderfield has already left an indelible mark. This week he announced plans to force the banks to raise more than €20bn of fresh capital by the end of the year and seized control of Quinn Insurance.

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He came, he saw, he conquered. Well that's what it feels like anyway. This weekend, as they celebrate Easter, Irish bank bosses and Quinn Insurance owner Sean Quinn must be wondering if they too have been crucified by Elderfield.

Since he took up his job at the beginning of January, the 44-year-old Englishman has shaken up the Irish financial services sector as it has never been shaken up before. To say that Elderfield's brisk no-nonsense approach has come as a shock to some of those being regulated would be an understatement.

Tuesday, March 30, 2010 will go down in Irish financial history as the day everything changed. As the true costs of the banking collapse finally emerged it was clear that things would never be the same again. Light-touch regulation, in most cases no regulation at all, was out and a new, far more rigorous regulatory regime took its place.

Even before the multiple announcements by the Minister for Finance and the Financial Regulator on Tuesday afternoon, Elderfield was baring his teeth.

Administrators

That morning the Financial Regulator applied to the High Court to appoint provisional administrators to Quinn Insurance, effectively seizing control of Ireland's second largest motor and health insurer, stating that he had "serious concerns" about its management and financial position.

The owner of Quinn Insurance, tycoon Sean Quinn, reacted with fury to the move. He wrote to government ministers and opposition leaders, demanding that the decision to appoint administrators be "rescinded immediately". He then went on to criticise the regulator's move as being "the wrong decision".

Just in case this passed over the heads of the plain people of Ireland, Sean Quinn gave an interview to RTE's economics correspondent which was broadcast on the broadcaster's peak-time news bulletins on Thursday night.

In the interview Sean Quinn repeated his criticisms of the regulator.

However, the seizure of Quinn Insurance was merely the hors d'oeuvre for the banquet to come later that day when, in a series of synchronised announcements, it was revealed that the Irish banks would need to raise up to €22bn of fresh capital by the end of the year -- about €10bn more than most analysts had previously been expecting. In fact, the banks' eventual capital requirements could be even greater as Brian Lenihan told a shocked Dail that Anglo may need a further €10bn of fresh capital, in addition to the €8.3bn announced on Friday.

The reason for the banks' greater-than-expected capital requirements was Elderfield's insistence that NAMA receives a far higher discount, 47pc as against 30pc, on the €81bn of bad loans it buys from the banks and that the banks get their equity capital ratios up to 7pc by the end of 2010.

Nationalised

The banks' need to raise more capital than expected almost certainly means that the State will end up with a majority stake, probably in excess of 70pc, in AIB and almost half of Bank of Ireland; while EBS and Irish Nationwide will join Anglo in being totally nationalised.

If there is a financial equivalent of shock and awe then what happened on Tuesday was surely it.

Tuesday's announcements marked the definitive end of the old Irish regime of "sure 'twill do" financial regulation. And about time too. When the €43bn which NAMA will pay the banks for their bad loans and the €11bn which the Government pumped into the banks last year and the possible €10bn Anglo top-up are added, the total cost of the banking bail out will comfortably exceed €80bn with the taxpayer footing most of the bill.

That is the true cost of Ireland's past regulatory failures.

While the logic of Elderfield's position is hard to fault, his no-nonsense, take-no-prisoners style of regulation still represents a cultural revolution for bankers, ministers, and bureaucrats who had grown used to a, how shall we put it, more accommodating regime.

So far Sean Quinn has been the only person to go public but it is no secret that AIB bitterly resisted his insistence that it must raise so much extra capital; while Brian Lenihan's robust support notwithstanding, there were those in the Department of Finance who felt that he was forcing the banks to raise excessive amounts of capital which, in the current circumstances, could only come from the State. Not alone was Elderfield primarily responsible for the higher-than-expected NAMA discount he also subjected the non-NAMA portions of the banks' loan books to rigorous stress-testing.

Elderfield, so this line of thinking went, was placing excessive demands on the public purse at a time when the Exchequer was already under pressure. There have also been mutterings that Elderfield, who before coming to Dublin had spent two years as head of the Bermuda Monetary Authority, is a bird of passage who is merely using his current position to beef up his CV before moving to bigger job, probably in the UK.

So will Sean Quinn's very public opposition and the less vocal reservations of many others force Elderfield to at least partially row back? The general feeling is that so long as Brian Lenihan remains Finance Minister, Elderfield's position is secure.

A tough new regulatory system is essential if Lenihan is to achieve his goal of restoring the international credibility of the Irish banking system.

It may be costing the taxpayer an arm and a leg but it is difficult to argue after this week's announcements that Ireland isn't serious about cleaning up its banks.

If, however, Lenihan were forced to step down, would his successor prove to be as supportive of Elderfield's brave new regulatory world? In practice he or she would have very little choice, particularly in the short-term.

Now that the costs of the previous do-nothing regulatory regime have been laid bare, it would be a brave or foolhardy Minister for Finance who attempted to revert to the "good old days".

There must also be the suspicion that Elderfield, whose career shows that he is a no mean bureaucratic operator himself, has moved quickly to get the bad news out of the way early in his term. Not alone does this deny potential opponents the opportunity to mobilise, it also ensures that subsequent announcements will be, relatively, more benign.

Elderfield, a Leeds United supporter (well, no one is perfect), took a pay cut to move to Dublin.

Although his €340,000 package is more than the €280,000 paid to his predecessor, it is considerably less than the $730,000 (€540,000) he was getting in Bermuda. He seems to have found Bermuda, an island just 20 miles long and never more than four miles wide with a total population of 65,000, a tad claustrophobic.

Will he tire of Dublin's sometimes incestuous financial circles as quickly?

While no one expects Elderfield to see out the rest of his career in Ireland, he has a strong incentive to succeed in sorting out the mess that is the Irish banking system.

If he does, then there will be very few people in this country who will begrudge him any future success elsewhere.

Irish Independent

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