ECB wants Honohan to have veto over watchdog
The European Central Bank (ECB) has advised the Government to give the governor of the Central Bank here, Dr Patrick Honohan, an "explicit'' right to veto funding and budget decisions by the financial regulator, if they infringe his independence.
The Government is currently drawing up legislation for a new regulatory system that will effectively merge the Central Bank and the Financial Regulator. It also inserted some changes to the regulatory system into the recent NAMA bill.
The ECB said it was important that the governor of the Central Bank was granted an explicit right to oppose any funding, budgetary or staffing decisions taken by the regulator, if they had implications for the independence of the Central Bank, and Mr Honohan's role at the ECB itself.
The governor should be able to block decisions in these areas, particularly if they are incompatible with his current responsibilities.
The Frankfurt-based ECB has been concerned for several years that funding decisions could be taken by the Financial Regulator, once known as the Irish Financial Services Regulatory Authority (IFSRA), that could threaten the Central Bank's independence.
The ECB, in a recent opinion passed to the Government, said it was of "critical importance'' that the Financial Regulator should not seek to influence the governor in his role as a member of the ECB.
The Government's push to merge the Central Bank and Financial Regulator is set to move a step closer this month as it takes delivery of a draft of complex legislation on a new watchdog regime.
Legislation setting up NAMA permits a stop-gap measure of combining the two bodies under a single board, although Finance Minister Brian Lenihan has yet to streamline the size of the combined boards.
Meanwhile, the European Commission plans to set up two pan-European financial authorities -- a systemic risk council, chaired by the ECB, and an authority to set standards for the day-to-day supervision of institutions.
The spin-off of the Financial Regulator from the functions of the Central Bank in 2003, with a 'light touch' mandate, is widely viewed to have contributed to the property bubble and the financial crisis .
The Central Bank issued numerous warnings that the property boom was unsustainable and the country's open economy vulnerable to a serious international shock.
But critics point out that neither the Financial Regulator nor the Government acted on those alerts.
Dr Honohan was appointed the new governor of the Central Bank last autumn, while the new Financial Regulator, Matthew Elderfield, took up his position early in January.