Tuesday 25 June 2019

Fixing the Government is now more important than fixing our banks

Regulator shoulders some blame but passes the buck in report

Brendan Keenan

Brendan Keenan

READING the recent reports from the Financial Regulator and the Central Bank, it strikes one that they would never have made it as bus conductors, in the days when buses had conductors.

The author Sam McCaughtry told the story of a bus-conducting uncle who was fired when the driver of his bus rammed it into a low bridge; on the grounds that the conductor is responsible for the safety of the bus.

When he queried whether this applied even when some fool of a driver was going under a low bridge, he was told: "Especially when he's going under a low bridge". The distinction between power and responsibility has rarely been better put.

In the case of Irish financial supervision, the two are extremely difficult to disentangle. There has been much disclaiming of responsibility, and denial of powers. The Central Bank in particular has pleaded innocence in the banking crisis, on the grounds that financial regulation had been separated from central banking. Therefore, the regulator had failed in its duties, and the bank had merely come in to pick up the pieces -- insofar as the pieces can be picked up.

It is a disclaimer one finds impossible to accept, because of the existence of an umbrella board for both organisations. Despite what Central Bank governor John Hurley had to say at his retirement press conference, there is no separate financial regulator in Ireland. There is a single body -- the Central Bank and Financial Services Authority of Ireland (CBFSAI) and Mr Hurley, as governor, is its chairman.

I bet most of you never heard of it. Yet that is what it says on the tin -- the most recent tin being the Central Bank's annual report. Yet it had virtually nothing to say about how and why the Irish banking system was brought to the brink of collapse. Perhaps we must wait for its Financial Stability Report.


The regulator, in its report, does indeed shoulder some of the blame, but tends to pass the buck to the banks. This is rather like the police blaming criminals for the crime rate. It is of course true, but beside the point. It is the duty of police, if not to eliminate crime altogether, to at least keep it to tolerable levels, using the powers at their disposal.

And there, perhaps, is the point. How much power did the regulator actually have to prevent this disaster?

In that context, the most striking line in regulator chairman Jim Farrell's statement was the one which read: "It is arguable whether any regulator, acting unilaterally in an economy focused on growth and fostering competition, could have materially mitigated the property bubble. This would have required a concerted effort by all stakeholders in the economy."

Such an ideal regulator would certainly have had to act unilaterally. Ranged against it would have been the Government (and most assuredly its Taoiseach), the opposition, the banks, the people trying to sell property, the people trying to buy property and -- it has to be said -- much of the media, for whom the property bubble delivered a cornucopia of revenue.

That is why asset bubbles happen so frequently. They are wildly popular while they are inflating. That is why the job of central banks is -- as one Fed chairman put it -- "to take away the punchbowl while the party is in full swing". But such is the mania which overcomes people that nothing short of a recession may do the job; something another Fed chairman, Alan Greenspan, could not countenance.

The Irish central bank has no such power anyway -- and its freedom of action was limited even before we joined the euro. Now, the only body which could conceivably kill the animal spirits in such a bubble is the Government. It would have to do so by taxing us all until we just stopped shopping, buying property, creating jobs, placing advertisements and doing all those other wonderful things.

That would have required an awful lot of tax; perhaps as much as we are going to have to pay now to clean up the mess. It was never going to happen, was it?

This does not excuse the last government for making things worse instead of better -- with huge property tax breaks, for heaven's sake. Nor does it excuse all Irish governments of every hue for not taking their duties seriously and appointing people to boards and executive positions in financial supervision (and everything else) who are not properly qualified for the jobs.


It does not excuse the banks for lending various individuals billions of euro each -- many of whom seem to have had few qualifications for being entrusted with such enormous debts. Nor does it excuse the regulator and bank for ignoring both the scale of this lending and the simple basic financial ratios which have always underpinned sound banking.

Many of these problems are about to be fixed, with high-powered financial brains hired by the regulator, a return to financial measurements instead of "principles," and an EU regulator to put the frighteners on weak-kneed governments. But that is just banking supervision. Nothing is being said about how to fix government itself. We are as far from having a strategy to manage a small, open, exposed economy in the eurozone as we were in 1999. Further actually, since most of the advice floating around at the time has not only been ignored, but forgotten. For now, fixing Irish government is more important than fixing Irish banking.

The fact is that all these plans to control future reckless behaviour by banks are probably a waste of time.

Banks will have no opportunity to behave stupidly for many years to come. No-one will want foolish loans, and the banks will not have the capital to provide them even if requested.

Instead, the problem is more likely to be how to provide sensible loans for productive purposes. The post-Nama banks may be so shrunken and strapped for profits that they are unable to provide even equilibrium levels of credit.

Asset bubbles will be the least of our worries. Whatever experts the CBFSAI hires, it should make sure they are all-rounders, able to apply their brains to a variety of tasks.

Today's news headlines, directly to your inbox every morning.

Don't Miss