Tuesday 16 January 2018

No board member of Financial Services Regulatory Authority had bank regulation experience, banking inquiry told

Liam O' Reilly former CEO Irish Financial Services Regulatory Authority arrives a the Oireachtas Banking Inquiry at Leinster House, Dublin. Photo: gareth chaney Collins
Liam O' Reilly former CEO Irish Financial Services Regulatory Authority arrives a the Oireachtas Banking Inquiry at Leinster House, Dublin. Photo: gareth chaney Collins

Clodagh Sheehy

None of the Board members of the Financial Services Regulatory Authority had experience of bank regulation when the Authority was set up, a former chairman has told the Banking Inquiry.

Mr Brian Patterson agreed with Deputy Kieran O’Donnell that he had been “ignored” when he approached said Finance Minister Charlie McCreevy at the time about the need for staff with regulatory experience.

Mr Patterson was chairman of the Authority from 2003-2008.

He told the Committee that the Regulator had “clearly failed in its duty to uphold the safety and soundness of Irish banks.

“As chairman of the Authority I accept responsibility for my part in that failure. It is something I regret deeply. Had I known then what I know now, things could have been very different.”

When it was set up, he explained, none of the Board members of the Authority had any experience of regulating banks and in hindsight there was not enough training.

“There was little or no acceptance that prudential regulation was in fact the ultimate consumer protection for depositors, shareholders and, as we now know, taxpayers.”

It is clear with hindsight, he said,  that the Financial Regulator, as it was constituted, was not entirely fit for purpose.

Stressing how priority was given to consumer protection, Mr Patterson described how in the early years (prior to 2006) there was one very heated exchange about this issue between the Regulator and the CEO of one of the large banks.

“In my presence the CEO of a large bank threw a bunch of keys across the table to our CEO and asked him if he wanted to run the (expletive) bank”, he added.

He said the Financial Regulator as constituted had “an overly complex structure with an extremely broad mandate which emphasised consumer protection as the main priority”.

It also had a complex entanglement with the Central Bank which limited the Regulator’s effectiveness in a number of way.

The shortcomings in the structure, however, did not alone explain why the system failed.

“The Authority simply did not see the enormity of the risks being taken by the banks themselves and the calamity that was to overwhelm them.

“Had we known then what we know now, we would, of course, have acted more strongly and used whatever powers were at our disposal with the forcefulness required to rein in the banks’ lending.”

Former Financial Regulator Liam O’Reilly told the Inquiry he had missed the “iceberg” that became the financial crisis when he was retiring from office in 2006 and thought he had left the office in good state.

Mr Reilly regretted that failures in the system “were not recognised during my tenure in office”.

On a personal level he had “not recognised the extent of the exposures that were around”.

He told Deputy Michael McGrath that they had operated the system. “We didn’t have the sense of danger that was required at the time” and because of that “we didn’t recognise there needed to be a change in the system.

The former Financial Regulation added they “could have adopted  a more aggressive and intrusive policy”  but that would have required more resources.

Mr Liam O’Reilly who was CEO from 2002-2006, stressed that it was “now apparent that for certain banks more robust measures were required”.

He now accepted that Principles Based Regulation had “major shortcomings” and the Regulator needed to adopt  a “more intrusive and aggressive approach”.

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 of the Irish Financial Services Regulatory Authority (IFSRA) 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.”

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”.

Mr O’Reilly defended his taking up positions on the board of Merrill Lynch in 2007 and Permanent TSB in 2008 after his retirement.

He told Deputy John Paul Phelan he did not believe there was a conflict of interest.

He said he had not done it for the money, “financial gain was not top of my mind”. He had done it because he thought he might be of use.

“When one retires what is one to do? Am I to go down for the bread in the morning and have the cup of tea?”

The right to work, he added was still a constitutional right.

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