Friday 19 July 2019

More bank reform before pay cap lift

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The resignation of the Allied Irish Bank chief executive, following the recent departure of the bank's chief financial officer, has given rise to a suggestion that the imposed cap on bankers' pay should be lifted. The suggestion is premature. Finance Minister Paschal Donohoe recently announced that his department has issued a tender for a consultancy firm to review bankers' salaries. The outcome, of what is expected to be a lengthy process, should be awaited and then duly considered before a decision is taken.

The Government was obliged to take stakes in AIB, Bank of Ireland and Permanent TSB following the banking crash 10 years ago. Since then top executives' pay has been capped at €500,000 for those in senior positions in AIB and PTSB. While this is admittedly below some international standards, it is still a considerable sum. Further reform of the banks is required, however, before a decision can be taken to lift the pay cap. Central to this reform is the issue of the continuing behaviour and culture in most banks and whether laws should be introduced to make the mismanagement of financial institutions a criminal offence.

By any standard, the mismanagement of Ireland's banks was outrageous, but the repercussions for individual bankers have been relatively scant. Some have departed with comfortable pensions, and others have also moved on to work abroad or elsewhere in the financial sector. But of all of the players in the country's economic and banking crash - banks, regulators, politicians and civil servants and, indeed, the public - it is bankers, top and middle management, which have escaped relatively scot-free.

In a report last week, the Law Reform Commission concluded that Ireland should not introduce a criminal offence of mismanagement of a financial institution, a conclusion which ignores the advice of Patrick Honohan, the former governor of the Central Bank who was appointed to steer the country through the crisis from 2009 to 2015. In this newspaper today, the economist Colm McCarthy also makes a convincing case for the introduction of criminal offences in relation to mismanagement of the banks.

A recent report by the Central Bank has also made troubling findings in relation to the ongoing behaviour and culture of the banks. Among these are that several executive committees display "firefighting behaviour", focussing on short-term issues which hamper capacity to design a long-term cultural transformation process; some banks also continue to display the remnants of the crisis-era mindset resulting in occasional reversal to 'command and control' leadership styles when emphasis should be on collaborative approaches; there is also a need to increase the powers and decision-making ability of senior staff, and further concerns around over-optimism regarding the successful transition to a consumer-focused culture.

Clearly, there is much more work to be done. These issues should be satisfactorily resolved before a decision is taken on bankers' pay cap. Meanwhile, the State's investment of €20.75bn in AIB must be protected as the Government plans a phased and careful exit over time.

Sunday Independent

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