Ex-IMF official casts doubt over single regulator
A STRONG and independent European banking regulator would not necessarily have prevented the catastrophic lending policies in Irish banks, former International Monetary Fund official Ashoka Mody said in a new paper on the future of the euro.
The issue of a single regulator, or Single Supervisory Mechanism, for Europe's banks is one of the most divisive issues in European politics today with Germany and some other countries dragging their feet, as the countries that share the single currency try to come up with new mechanisms to regulate banks which are of systemic importance to the eurozone.
"Common supervision across countries is justified on the principle that domestic regulators will look the other way while their banks act irresponsibly," Mr Mody writes in a paper for the influential Brussels-based Bruegel think tank.
"The excesses of the Irish banking system in the years before the crisis are often cited as an example, and the criticism is valid.
"But in moving to a common supervisor, what is the guarantee that these same problems will not be repeated?" asks the former IMF official who was a key player when Ireland was bailed out in late 2010.
Prof Mody has since argued that the troika insisted on excessive austerity which, he says, damaged the prospects for economic recovery.
He cites research by Central Bank governor Patrick Honohan which argues that international regulators also missed the signs of an overheating banking sector during the Celtic Tiger era.
"The presumption is that, tasked with responsibility for the Single Supervisory Mechanism, the ECB will have the incentives and the tools to act as the guardian of banking safety," Prof Mody writes.
"While Irish regulators were evidently at fault, international overseers (with none of the same incentive problems) did no better.
"Indeed, the IMF's Financial Sector Assessment Programme gave a clean bill of health to Irish banks."