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Thomas Molloy: Ceding power of Central Bank to EU makes sense

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FEW nations understand better than the Irish that the question of who bears ultimate responsibility for a country's banks is a matter of the utmost importance.

German Chancellor Angela Merkel made a significant concession yesterday evening when she said for the first time that a European banking union should be one of Europe's medium-term goals.

Her comments came ahead of private talks yesterday with EU Commission President Jose Manuel Barroso to look at ways of ensuring that systemically important banks can be put under the supervision of a Europe-wide authority.

The idea has been gaining momentum so quickly in European circles that some sort of agreement is almost inevitable. It won't help us sort out the current mess but it may well prevent a similar mess in future.

One of the first people inside the European decision- making process to call for a super regulator was Central Bank governor Patrick Honohan.

Prof Honohan said just over three weeks ago in a speech in London that a new pan-European regulator was needed and spelled out the advantages in his own straightforward style.

He believes that a pan-European regulator wouldn't be affected by national blind-spots like the Irish property bubble, and could therefore do a more effective job of supervising banks.

"In periods of collective national myopia, such as that which generated the property bubble in Ireland, the chance of getting somebody whose judgment is not affected is greater, the more distant their base," was how the governor put it.

He also argued that paying off bondholders in bankrupt banks should be "the responsibility of a Europe-level resolution agency" and not of "stressed countries" -- an opinion that is devoutly shared by most people here.

The sight of a well-paid man arguing that his job should effectively be abolished is so rare that we should all sit up and listen when anybody who fits that description argues that somebody else should be doing his job.

Prof Honohan was not quite arguing for the abolition of the Central Bank of Ireland and he was quick to point out that a local national bank can pick up on "vibes and the market talk", but he was still effectively saying that the Central Bank should cede most of its remaining powers.

The experience here in Ireland is that he is right.

We have seen time and again that we do not have the domestic discipline to burst bubbles and implement restraint.

Experience also shows that no country can afford to bail out its banks alone if there is a large bust. A pan-European resolution agency would act as a form of insurance that would ensure that countries no longer have to go bankrupt if their bankers go on a crazy lending spree.

The reality of banking today is that most banks have international interests that cannot be regulated by a national regulator. Allied Irish operated in Poland and the US, Anglo Irish had operations in the US, and Bank of Ireland was a significant lender in the UK.

Problems in any of those countries could have forced Irish taxpayers to shell out billions. This problem is not unique to Ireland.

Bank of England governor Mervyn King put it well some years ago when he pointed out that "global banks are global in life, but national in death".

While pan-national regulation of the banking system is clearly an idea whose time has come, there is a good case to be made for regulation of other financial organisations, such as hedge funds, which are poorly understood but also pose a real danger to individual countries.

It was the collapse of a hedge fund in 1998 that triggered the first modern financial crisis in Europe and hedge funds still pose a real danger to the financial system today.

The UK wants to assess the risk hedge funds pose the global financial system -- a position strongly endorsed by Germany. Ireland, which is home to some hedge funds in the IFSC and many other complex financial dealings, should be quick to support the UK's efforts to regulate organisations that are not traditional banks but still endanger the financial system.

The problem is that many hedge funds are based in off-shore financial centres such as the Cayman Islands, so some sort of global regulator may well be needed in time. A global regulator is still some time off but we now know that the chances are high that we will soon have a European regulator.

ThE ground rules for such a regulator could be agreed by the end of the month when European leaders meet for a summit that could change Europe forever by ushering in an era of much closer political union.

Some of those proposals will be difficult for Irish people to accept but the idea of a pan-European banking regulator should be popular. This country is a testament to what can happen when the regulators are asleep at the wheel and fail to grasp the big picture.

Irish Independent