Tuesday 28 January 2020

We need fair referee who will show red card to bank secrecy

The Wall Street protesters may be misguided -- a new book argues they should direct their ire at regulators

THE right place and the right time. The Occupy group who camped outside the Central Bank before being moved on -- probably gratefully -- by the gardai, had chosen the better part, according to an American economist who knows a bit about it.

The protesters took their inspiration from the Occupy Wall Street group. But Gerard Caprio, professor at Williams College in Massachusetts, thinks they should move themselves on -- to the offices of the US banking regulators.

Prof Caprio, who has co-authored a new book (Guardians of Finance by James Barth, Gerard Caprio and Ross Levine, published by MIT Press) on the subject, thinks the financial crisis is down to the failures of regulators.

His field is the USA but, in Irish terms, he thinks the hard questions should be asked -- not of Anglo's Sean FitzPatrick or AIB's Eugene Sheehy, but of former Financial Regulator Patrick Neary and ex-Central Bank boss John Hurley.

In one sense, we all know that and questions have been asked, even if the answers are unsatisfactory. In another sense, anger naturally concentrates on the people who lost all the money; not those whose job it was to stop them doing so. A book called Regulators is an unlikely bestseller. You can't even make a rude joke out of it.

The fact is that the purpose of investment banks in particular is to make lots of money by taking risks. Only a powerful, determined regulator can ensure that the bank is not taking on so much risk as to threaten its very existence.

It ought to be easier to deal with normal banks, whose basic job is to borrow money short term (through deposits), with a bit extra on the markets, and lend long term at a profit for things like mortgages and business investment.

Yet in a number of countries, with little Ireland and Iceland leading the herd, this simple task was abandoned by regulators, with disastrous consequences. Their stance amounted to saying to Messrs FitzPatrick, Sheehy et al: "It is up to you to choose between making wagon-loads of money for yourselves, your executives and shareholders, or foregoing all those riches because it might be risky. Y'all be careful now."

We may get angry, but we really should not be surprised that most bankers chose the former. There were honourable exceptions to various degrees, such as Barclay's and Lloyd's TSB -- which managed to crash and burn after a safe landing. But in most cases, the few individuals who cried wolf were thrown to the pack.

This is where the failed regulators have no excuse. If risk departments are being over-ruled, a regulator should know about it and find out why.

In the case of Anglo, they did not even have to find out. The bank was breaching its published lending limits.

The best glimmer of an excuse is that it would have been impossible for an Irish regulator to act in this way unilaterally. When the Federal Reserve in the US and Britain's Financial Services Authority were sounding no alarm, what chance that Mr Neary could have ordered the money-making machine be switched off?

Why did the big, supposedly expert regulators fail so dismally?

Surprisingly, Prof Caprio thinks they have no more answer to that in the US than we do in Ireland -- maybe less. The theoretical rejection of market interference played a part, but he likens the main cause to the scientifically observed bias of referees in home games: they are afraid of the crowd.

In some GAA matches, referees have good reason to be nervous. But essentially it is just the pressure from the roar of the fans which, even unconsciously, affects referee neutrality. In the case of financial regulators, pressure from the bankers, with whom they must deal daily, and politicians, who want no unpleasantness, leads to a bias against tough regulation.

The book suggests creating another layer, to stand "sentinel" over the regulators. Its members would not deal with banks, but would have full access to information to scrutinise what the regulator was doing. It would have to be terribly independent from government.

As well as being expensive, this is not really convincing in an Irish context. Another idea -- that failed regulators should lose their jobs (and maybe some of their pension) has its attractions, but is also less than convincing.

What is convincing -- in this as in so many other areas -- is more public information. Financial institutions are whingeing away about the attitude of the reconfigured Central Bank under Matthew Elderfield.

It is impossible to know whether they are merely not used to being regulated properly, or whether the bank is over-compensating for past omissions and damaging the industry.

One agrees with Prof Caprio that most of the claims of commercial confidentiality are self-serving bunkum. If no one knows what is happening, it is highly unlikely it will be done well.

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