Regulators should have taken a less deferential approach to the banking industry, the governor of the Central Bank has said.
In his opening statement to the Oireachtas banking inquiry, Prof Patrick Honohan said there should have been a greater degree of intrusiveness and assertiveness in regulating the banks.
This would have “disrupted a pattern of inconclusive engagement with the banks”.
He also said the government guarantee of subordinated debt of the banks, instead of just bank deposits, was “clearly a mistake”.
The formal guarantee “of all long-dated debt was also unnecessary” and “bound to constrain the authorities’ ability to restructure or wind down failed banks before the expiry of the initial guarantee”.
“With the benefit of hindsight – had the regulatory authorities had any notion that heavy losses could be involved – an alternative strategy of putting Anglo (and Irish Nationwide Building Society) into liquidation on September 29th, while standing behind the rest of the system, should have been more favourably considered.”
External partners
He said “external partners might have responded to such an idea with compromise proposals that might have alleviated the subsequent pressures on the Irish exchequer”.
He also said greater consultation with EU partners would have been “highly desirable” and could have helped Ireland to be “less on the back foot in subsequent negotiations”.
Prof Honohan, Central Bank governor since 2009, spoke at the inquiry on The Irish Banking Crisis; Regulatory and Financial Stability Policy 2003-8, a report he prepared in May 2010 on the role of the Central Bank and the financial regulator prior to the bank guarantee of September 2008.
He will attend the inquiry again later in the year to discuss other aspects of the banking crisis.
He said there had been an excessive reliance on a regulatory philosophy “that implicitly trusted that well-governed banks could be relied upon to remain safe and sound”.
There were also “deficiencies in skills and staff resources”.
The language of successive published financial stability reports in advance of the crisis was too reassuring and was “a triumph of hope over reality”, he said.
Too optimistic
“In the end senior officials in both institutions, as well as many elsewhere at home and abroad, were too optimistic about the strength of the economy and the Irish banks,” Prof Honohan said.
He also said extensive changes had since taken place at the Central Bank to ensure that the identified shortcomings “have been removed as far as possible”.
