NEW limits on how much customers can borrow are to be introduced as part of a radical reform of how banks are policed.
In a wide-reaching paper outlining its improved approach to banking supervision, the Central Bank has said the days of consumers being able to borrow freely are essentially over.
Credit limits are set to be more tightly regulated and restrictions on mortgage and other lending will be introduced, based on people’s individual disposable incomes.
Yesterday’s report also pointed to a tighter regulatory focus on banks’ remuneration policies, governance and risk management levels. In this regard, the Central Bank said it would come down hard on any bank failing to properly manage its risk levels, ultimately forcing it to cease trading if necessary.
“Where we don’t see risks being managed, we will intervene. In the most serious situations, we will stop you doing business unless – or until – proper controls are put in place,” said Jonathan McMahon, the Central Bank’s assistant director general for financial institutions.
“We will make life difficult and expensive for banks which fail to manage risk adequately,” he added.
The proposals also call for a broadening of lending activity to other areas of the economy, adding that failure in this regard “would be unforgivable”.
The Central Bank has also pledged a closer look at banks’ governance levels and clear assessments of the effectiveness of their boards, with new rules being proposed to minimise the number of directors in each bank and for board membership to be reviewed every three years.
The bank also admitted its resources had been far below what was needed over the last few years and revealed it has plans to take on 150 new staff, bringing the workforce to 1,300.
Another 200 employees are expected to be hired by 2012.
Mr McMahon said the new regime will be based on risk but not light-touch regulation.
“‘Risk-based’ is not a synonym for light-touch regulation. Where we don’t see risks being managed, we will, as we are doing already, intervene,” he said.
Yesterday’s proposals have been broadly welcomed.
UCD economics lecturer Professor Ray Kinsella said they would deliver not just a new regulatory structure but also a whole new mind-set and approach to the area.
“The positive aspects are that the proposals are focused on actual outcomes and surround the idea of an assertive supervisory regime and credible enforcement action. The fact that the Central Bank isn’t looking for an adversarial relationship with the banks is important too,” he said.
Prof Kinsella also suggested that higher standards and a more rigorous regulatory approach will send the right signals to the EU and to international investors that a sea change in Ireland’s regulatory mind set is under way.
“It’s important, too, that we’re aligned with the big international economies on regulatory outlook and it should be the start of the whole process of rehabilitation and restoration.”
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