Bracing for the eye of the storm
It may soon be time to get out the bucket and spades, but for Central Bank governor Patrick Honohan and his second in command Matthew Elderfield, this looks set to be an exceptionally busy summer.
While Honohan will be shuttling between Dublin and Frankfurt, helping to man the monetary pumps in the effort to douse the eurozone flames, Elderfield, as head of financial regulation, is in charge of the home front.
Now almost two-and-a-half years into the job, Elderfield has gone some way towards fulfilling his early promise in revamping the country’s structure of financial regulation. Yet he continues to be dogged by the legacy of neglect left behind by his predecessor, Patrick Neary.
The task of regulation is a huge one.
In the Republic, there are 1,900 multi-agency intermediaries, 420 authorised advisers, 3,555 insurance and reinsurance intermediaries, 77 credit institutions, 1,237 mortgage intermediaries, 404 credit unions, and over 5,000 collective funds.
Elderfield has presided over an impressive overhaul in supervision.
A few days ago, for example, he fired off a letter to investment and stockbroking firms in which he called for a shake-up in corporate governance.
It was made clear that genuinely independent non-executive directors would have to be appointed while board subcommittees would need to be reined in.
Reports in writing of key board decisions would have to be kept along with detailed job descriptions on all staff.
On his arrival in the job from Bermuda, where he ran the financial authority, back in Jan 2010, Elderfield made clear his intention to shake up Ireland’s cosy banking and finance community. He soon found himself facing down one of the country’s most powerful businessmen, Sean Quinn, after it became clear there were large clouds hovering over Quinn Insurance.
The takeover of the Quinn financial empire was a seminal event, one that was fiercely resisted by Quinn and his supporters.
Elderfield hardly batted an eyelid, passing this test of his authority with flying colours.
But the twin issues of mortgage arrears and bank lending have proved to be challenges of an even more stubborn variety.
The arrears mountain grows ever larger while efforts to get the banks to lend more into the economy have proved fruitless.
Elderfield and Honohan achieved a big hit when, last year, they ensured that a credible evaluation of the Central Bank’s underlying financial position was carried out, paving the way for a recapitalisation which — they still insist — provides a buffer against the coming wave of bad debts and the likely restructuring that will be required.
As Elderfield made clear a few weeks ago, the job is only partly done.
“As a Central Bank, we need to change our culture as much as our processes. If we aren’t better at challenging each other about the management of risk, we wont be able to raise our game to challenge the CEOs of the high impact firms we supervise.”
But the regulator has himself been accused of being too cautious in his approach to the banks, particularly in regard to the issue of mortgage arrears.
In reality, he must walk a fine line between ensuring the banking system is soundly based and ensuring borrower debt is kept at sustainable levels, with decent levels of lending also being let flow into the economy.
He recently insisted the problem of arrears is not one that is “susceptible to quick fixes or silver bullets”, adding that “the Irish taxpayer does not have the resources to somehow eliminate or reduce negative equity in the mortgage market”.
However, he also warned banks against pushing consumers deeper into debt. He cautioned lenders against “kicking the can down the road”, adding to debt in cases where there is “no realistic prospect that standard forbearance is going to work”.
Elderfield has offered limited solutions. The Central Bank intends to make it easier for people in negative equity to move house by ensuring they are offered negative equity mortgages. In general, caution will be the order of the day.
His approach to bank lending in general has been tinged with a similar wariness. In his view, expressed in March, the banks need to do more work to go through their existing book of troubled loans “so that they have a better idea of where they stand and of their capacity for new lending”.
Cold comfort for those wondering why the banks are not lending out more, having been bailed out to the tune of around €64bn.
It is perhaps too much to expect a Central Bank regulator to offer solutions to the social and economic problems that have followed in the wake of the bursting of the financial bubble. This is really the task of an elected government.
However, where Elderfield would appear to have justified his €340,000 salary is in his “without fear or favours” approach to the overhaul of a regulatory structure that was allowed to fall into disuse, with disastrous consequences for us all.
* Born: 1966.
Education: n1987: BA, School of Foreign Service, Georgetown University, Washington DC;
* 1988: MA, International Relations, Cambridge University.
Career: n1988-1999: Financial sector lobbyist/researcher;
* 1999-2007: Britain’s financial services authority — senior supervisory roles. Responsible for Northern Rock in the run up to its bailout in 2007;
* 2007-2009: Chief executive of the Bermuda Monetary Authority;
* 2010-present: Head of financial regulation/deputy governor at the Central Bank of Ireland.
* Marital status: Married.
* Residence: Sandymount.
* Leisure: Cycling, music, and supports Leeds Utd.
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