Thursday 29 September 2016

Concentration of power can explain the banking disaster

Published 04/02/2016 | 02:30

Why? That is the question. There seems to be general agreement that the banking inquiry, despite its best efforts, did not get much beyond the well-trodden path of what happened. As to why, we are little the wiser.

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This matters, because this was no ordinary collapse. As economist Colm McCarthy has stressed, it is highly unusual - virtually unprecedented - for all the banks in a country to go bust during a crisis. Grotesque and bizarre as well, to complete the famous old phrase.

Most of the disappointment around the inquiry results centred, not on the absence of "why" but of "who".

That in itself should give pause for thought. Names attract attention and the absence of personal blame risks limiting attention on evidence about the climate in which they operated. But therein lies the answer to "Why?"

It is not tenable to say that, in those particular years, every bank, regulatory agency relevant government department and political office was staffed by knaves and fools. At any moment in time, there are plenty of both in all institutions but entire financial systems do not collapse because of personal inadequacies.

Something else was going on. We need to know, and have not found out, what it was. Much more to the point, we need to know if it is still going on. Are the changes which have come about sufficient to prevent conditions where even sensible people, never mind knaves and fools, are swept away on the tide of madness? The one exception to the no-blame approach was, of course, Jean Claude Trichet. Presumably he is thought unlikely to seek the protection of the Irish courts with their unusual view that personal reputation is among the greatest of constitutional rights. But his place in the headlines illustrates the difficulty of separating the man from the machine.

Mr Trichet is gone but the ECB is still with us, and not enough has changed. Before the crash, it was not even clear if the bank could act as lender of last resort if required. When it was required, it had to make things up as it went along - thereby inventing the remarkable doctrine that it would lend to insolvent banks (naughty, naughty) provided their host governments made them completely solvent under terms set down by the ECB.

That was not all, or maybe not even mainly, Mr Trichet's doing. Blame lies with the absence of any plausible architecture or clear mandate for the role of the ECB in banking system. It now has a supervisory responsibility which may help prevent a banking crisis on this scale in future but political disagreements means we are not much the wiser as to what would happen if one did occur.

No Irish government had faced circumstances like 2008 before but the civil service and central bank seem to have learnt few lessons from earlier problems with a disastrous AIB investment. Except perhaps - along with some insurance disasters - that the taxpayer/customer can always be called upon to pick up the pieces.

Let's hope that the easy target has been modified in the light of experience. I would not like to stake my finances again on the incomplete, inadequate Eurozone banking union and wind-up mechanisms. As regards probabilities mentioned last week, the odds of more European banking trouble look a lot higher than the odds of getting a proper European system to deal with it.

We will have to look to ourselves. This is where the banking inquiry report could be useful - not because it has all the answers but because it raises the right questions.

We needed Europe to take regulation out of the domestic mandarins, so it was good to see TDs suggesting things which would be deeply unpleasant to governments of all parties, such as having Budgets analysed independently. (Manifestos should be ignored by all sensible people).

We are already part of the way on that one, with the EU Commission and the Fiscal Advisory Council and a new body seems unnecessary; what is needed is a genuine acceptance that it is in all our interests that there should be checks and restraints on government power in general.

That would mean, for a start, appointing people to positions of authority who could be expected to cause difficulty for governments and commercial interests.

The report calls for those with relevant expertise to be appointed to the central bank board, but it is just as important that they are people who can be awkward. Foreigners, for a start.

In the case of the central bank, its structure was exactly the opposite. There was even a statutory committee to represent the interest of the banks - although none for their customers.

Governors and regulators would boast that their duty was to ensure that the banks made lots of money. That was seen as the way to protect the customers. They would not accept that there could be times when their duty was to prevent the banks making money. Yet that is the nature of prudent banking.

We should not that be surprised that no one at the top in regulation, banking or government had the expertise or courage to cry wolf and surprise is noticeably absent from the report. The dice were loaded against them.

All relevant Irish legislation that I know of contains provisions to protect the interests of commercial enterprise, State companies, unionised workforces and ministers at the expense of customers and citizens in general. None of the regulators have the freedom and powers they ought to have, even if they did not have the Irish courts sitting on their shoulders on every occasion limiting their independence even further.

The courts are a mystery to the layman but it is also difficult to know why Irish politicians of every hue are so pliable when faced with the lobbying of vested interests. Certainly, the words "job losses" turn them to jelly, and their propensity to spend more than the economy earns makes them vulnerable to any passing bubble.

This combination of weakness and power in ministers and their officials may well be the fundamental explanation as to why the Irish crash was so awful and why there is such a palpable widespread feeling that it could all happen again.

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