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Financial Regulator Admits Banks Were Never Brought To Bear

Posted on: October 15th, 2008

Yesterday Patrick Neary, the Financial Regulator, came into answer questions before the Economic Regulatory Affairs Committee about his role in the current banking crisis. I have written here already about my views on his job performance and my views are well known. I wasn’t going to tread on eggshells when I got to put questions to him in person.

I do not hold the same view as some of my colleagues in that I believe he should resign. Moreover, he should have resigned some time ago. The reason is that it is very important that the Financial Regulator have the confidence of the people above everything else. It is obvious that he does not have the essential confidence that is necessary. The market investors in the banks have completely lost confidence in him, as have the banks’ depositors. Both groups have been voting with their feet. Investors have been selling their shares and depositors, certainly up to Monday fortnight last, were moving their deposits out of the banks as fast as they could to anywhere but those banks of which Mr. Neary is in charge. The only people who appear to have confidence in Mr. Neary are the bankers and property developers of this country.

Were such sentiments only coming from me, Mr. Neary would not need to worry too much. However, the criticisms of him are coming from everywhere. In an article in today’s edition of The Irish Times Mr. Michael Casey who worked in the Central Bank and is on the board of the International Monetary Fund states:

The Financial Regulator and Central Bank should have been more proactive at a much earlier stage in cooling the ardour of the property market. Even without the interest rate instrument there were several things which could have been done, ranging from moral suasion, to insisting on prudent loan-to-income and loan-to-property price ratios, from raising risk weightings for property to insisting on more diversified loan books within the banks.

He continues to make a key point about one of the problems Mr. Neary has inherited and of which he is part, by stating, “Close relationships between regulators and banks – difficult to avoid in a small country – will have to be ended”. The evidence is clear that the close relationship between the regulator and the banks is too cosy to be comfortable. Mr. Neary has often enunciated this point himself by stating he is not in favour of a highly regulated or rules-based system, but of a principles-based system. When asked for a definition, it is stated this allows “each regulated financial service provider to determine for itself how best to abide by regulatory requirements”. To me that is a licence to give all the cowboys in the banks freedom to do exactly what they like, when they like, within fairly loose rules. It is a laissez-faire attitude.

The statement, from two years ago, continues “We will seek to implement rules to the minimum extent necessary”. That is why all this has happened, as the rules were being implemented to the minimum extent necessary. There is plenty of evidence to support this. Mr. Neary will be aware of the Comptroller and Auditor General’s report from around two years ago which was very critical of the Financial Regulator. It stated the regulator was 30% off target for its own stated inspection target of banks. I believe the figures were one in four, or a 25% target. The regulator came in at 17%. According to the tables in the report, in the same year there were no unscheduled visits to the banks at all. In other words, spot checks did not happen.

These guys were running rings around the regulator, which is one of the great difficulties. In the period since Mr. Neary has been in office, apart from the Irish Nationwide fine of last week – which I suggest is in a completely different category because of the new events – I do not believe the Financial Regulator has fined the banks for any reason. Sanctions were brought against many smaller groups of people, such as intermediaries, insurance brokers and people like that. Rightfully, they were seen to be in trouble. The banks seem to have got away without any sanctions during the period, although the powers were given to the regulator to impose sanctions by the 2006 Act.

At the same time, the Financial Services Authority in the UK fined their banks £20 million. The difficulty we appear to be facing is that the thesis that the Financial Regulator is very close to the banks seems borne out by evidence. They seemed to be untouchables until very recently. I do not know of any instance where the regulator used its authority to stop particular candidates taking director positions in banks, which is also within the regulator’s power. I do not remember the regulator revoking a banking licence. It seems that the thesis that the Financial Regulator is so close to the banks is unanswerable, which is the reason the banks have been allowed to run riot in this crisis and lend to property developers willy-nilly.

I know Mr. Neary has been dealing with these matters for 36 years, working with the Central Bank initially and then IFSRA and the Financial Regulator, but he is part of a tradition of these bodies being too close to Irish banks. The evidence is there in what we are seeing today.

I have two other queries. The consumer panel, which sits independently, stated in the last report quoted in the Comptroller and Auditor General’s report that “We have seen very little evidence in the year under review that the Financial Regulator has had the resolve to stand up to some institutions and individuals who are misbehaving”. That is an independent group, set up to look at what the regulator is doing, and it indicates the regulator is not standing up to these guys. It goes on to state “It seems that when challenged by misbehaving institutions, the Financial Regulator simply backed down”.

That is the root cause of the problem, as Irish banks have been subject to what the regulator has termed a principles-based system, but this has allowed them to land the nation in the appalling mess we are in at the moment. The Financial Regulator bears responsibility for it and should resign as such.

Mr Neary replied, ‘I am a public servant and always act in the public interest. I enjoy the confidence of the authority.’

I then asked, ‘Does Mr. Neary enjoy the confidence of the banks?’

He answered, ‘I sincerely hope I enjoy everybody’s confidence but the Senator has said that is not the case.’

I pressed him on his relationships with the Big Banks, ‘Has the regulator fined any banks?’ I had to repeat the question three times before he gave me the straight answer of, ‘No. We have not.’

I do not think that we the tax payers should be paying for a government employee who is meant to be defending the little man and his rights when in reality he is actually embedded in the world of Big Banks and isn’t doing his job!