The Financial Regulator “could have adopted a more aggressive and intrusive policy” a former CEO of the Irish Financial Services Regulatory Authority has admitted to the Banking Inquiry.
Mr Liam O’Reilly who was CEO from 2002-2006, said such an approach, however, “would have required more resources.”
He stressed that it was “now apparent that for certain banks more robust measures were required”.
At the time the Regulator was of the opinion that enforcement action “would be more effective if it were in the form of a set of legally based codes”.
He now accepted that Principles Based Regulation had “major shortcomings” and the Regulator needed to adopt a “more intrusive and aggressive approach”.
Mr Reilly added that he “deeply regrets” that the failures in the system “were not recognised during my tenure in office.”
With hindsight, he said, it was clear that reports to the boards of banks, both from within and from external sources “did not provide sufficient information on the credit risks being taken”.
The level of commercial loan exposure to a small number of individuals was not known to the Regulator who relied on data in quarterly returns supplied by the banks.
The former CEO said the general consensus in the markets in January 2006 was that the Irish banking system was well capitalised and the Irish economy was healthy and growing.
“Whilst some vulnerabilities were signalled, their extent was not realised and there was no expectation of the magnitude of the shock that eventually occurred.”
The vulnerabilities, he added, included the increase in personal indebtedness and credit risk particularly in building and construction and a dependence on a narrow tax base, highly dependent on the property market.
The economic crisis, however, “would have been practically impossible to predict” and was not predicted anywhere in the world.
At the time the reports and the annual accounts of the banks “generally gave comfort to the Financial Regulator about the solvency of the institutions in question.
He felt now there were “inherent weaknesses in relying on the information provided in annual accounts.
“Such accounts were prepared by reference to accountancy policies which could not provide for unknown risks. It was a concern which we shared with the banks.
“Nevertheless, the annual accounts were statutory accounts, and as such, we rightly placed a good deal of reliance on them.”
Mr O’Reilly stressed that no issues of solvency were raised in any reports from auditors between 2003 and 2006.
He said the Financial Regulator within the Central Bank “has since 2008 adopted a more intrusive policy in its dealings with Banking Institutions.