They have been accused of failing in their role and conducting very little on-site inspections of the banks.
According to a report by Central Bank governor, Patrick Honohan an inadequate and poorly applied regulatory regime existed in Ireland. He describes the approach taken by the Central Bank and the regulator to the banks as “excessively deferential”.
A separate report from international banking experts Klaus Regling and Max Watson said the supervisory culture was “insufficiently intrusive” and staff resources were “seriously inadequate for the more hands-on approach that was needed”.
“Supervisors were perceived as reluctant to impose severe penalties, and during the key period when major governance problems arose, they imposed no penalties on banks at all,” his report said.
Professor Honohan said regulators did not move decisively and quickly enough against banks with governance issues and too much emphasis was put on fears of upsetting the competitive position of the Irish banks. He said the regulator appeared unwilling to rock the boat.
The damning report said there was no appetite by the regulator for legal cases and no penalties were imposed for breaches of prudential regulations before 2008.
Those interviewed for the reports included former Financial Regulators Patrick Neary and Liam O’Reilly. The report covers the period from the establishment of the position of Financial Regulator in 2003 to the end of September 2008 when the Government guaranteed the banking system liabilities.
Professor Honohan also said the regulatory approach was not persistent enough and insufficiently challenging.
He said there was “an under-resourced approach to bank supervision that, by relying on good governance and risk-management procedures, neglected quantitative assessment and the need to ensure sufficient capital to absorb the growing property-related risks”.
“Rocking the boat and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to ‘spoil the party’ and withstand possible strong adverse public reaction,” he said.
The report from Mr Regling and Mr Watson said that domestic financial stability reporting by the central bank failed to sound alarm bells loudly.
They said while the central bank noted worrying features, it did not trace their interactions vividly or warn how severe the emerging risks to bank soundness and ultimately to the living standards of the ordinary person would be.