Friday 23 February 2018

Matthew Elderfield: Regulation with real bite is key to rebuilding banking system

Matthew Elderfield

It will take time to recover to a stronger banking sector, backed by more effective regulation, and to sounder public finances. But the road to recovery has started.

The recent Central Bank stress tests are an important milestone on that road. A stress test is a way to make sure that the banks are strong enough financially to withstand future loan losses in a hypothetical economic scenario. The stress tests involved extensive checks by the Central Bank and leading international experts, unprecedented openness about the results and a heavy dose of conservatism to show sceptical markets that this was a serious and credible exercise. The result was a painful new bill for the taxpayer, but also a clearer roadmap to a well capitalised and right-sized banking system based around two pillar banks that can start to put the crisis behind them.

What's next for the banks and for regulation? And where does this all leave the Irish consumer? It's still going to take time to rebuild market confidence in the banks and to slim them down: they became bloated on borrowing from the capital markets to fuel reckless lending. So there will be a long hard slog of executing the new restructuring plan, steadily shedding non-core assets at the best price available and avoiding fire sales. The process of reforming the banks' boards needs to continue. The Central Bank has put demanding new rules in place on corporate governance, designed to broaden the gene pool of Irish corporate life. We are implementing new fitness and probity standards for persons working in the financial services sector. We will review all existing bank board directors against our new standards, including their track record in the period leading up to the crisis.

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