THE Irish financial regulator missed one of the basic warning signs when it ignored the fact that Anglo Irish Bank was breaking its own lending rules, a leading US expert on banking said yesterday.
Professor Gerard Caprio said this was part of a widespread failure of regulators in many countries to enforce existing rules which could have prevented much of the financial crisis.
"The breach of a bank's own lending limits is a warning that management is no longer putting the safety of the bank as its number one goal, and the regulator needs to take action quickly."
The Irish regulator, then headed by Patrick Neary, wrote to Anglo about the rapid growth in its loan book, which exceeded the bank's own guidelines, but took no action.
"Lesson one in how to regulate banks is: 'Stop rapid lending'," Prof Caprio said.
"The Occupy Wall Street people shouldn't be in Wall Street -- they should be outside the Federal Reserve. I understand people's anger, but I never think that bankers are working for me. I hope the regulators are working to protect me, and they fell down on the job."
Prof Caprio, who worked with Central Bank Governor Patrick Honohan in research on banking, argues in a new book that regulators need to have an outside body keeping check on how they are doing their job.
"We call it the sentinel. It would need to be a high-powered, independent body, with forensic financial accountants, lawyers and economists on it, which wouldn't come cheap," he said. "Regulators who fail to enforce the rules should face losing their jobs, or even financial penalties like loss of pension."
Prof Caprio, who is professor of economics at Williams College in Massachusetts, said he thought Ireland had done more to get to the causes of the banking crisis than the US.
"Ireland now has very good people working in regulation but it needs to get away from depending on having the right people, and more on creating structures that will work," he said.
'The Guardians of Finance: Making Regulators Work for Us' is co-authored with James Barth and Ross Levine