Banking ethics - Regulatory excuses just don’t wear

The chairman of the Irish Financial Services Regulatory Authority (IFSRA), Jim Farrell, testified yesterday before the Oireachtas Joint Committee on Finance and the Public Service that his office was too trusting in depending on the ethics of officials.

The problem was that the system was a principles-led supervision system aimed at protecting consumers. It depended on ethical behaviour and true and fair reporting by the board of directors and senior management. It is now clear, he said, that this did not happen in the case of Anglo Irish Bank.

With hindsight, Mr Farrell noted, things should have been done differently. Of course, IFSRA had not the foresight to realise what was likely to happen, and it failed to use the hindsight that was available. Either should have prompted a serious questioning of the bank behaviour.

Nobody should think IFSRA had no grounds for suspecting there was something rotten in the banking system. The whole country knew the banks had played fast and loose with regulations and the law.

Their collusion in defrauding the state of hundreds of millions in tax revenue in relation to the bogus offshore accounts had been well exposed. Moreover, the behaviour of the banks towards their own customers, gave new meaning to the term bank robbery.

In the circumstances, there can be no excuse forIFSRA being supposedly caught off-guard. What was the point in having regulators unless they were going to regulate? They were the dog that didn’t bark. This time last year Sean Fitzpatrick of Anglo-Irish Bank was publicly contending that there was too regulation in Irish banking. That should have set alarm bells ringing, especially when some IFSRA officials already knew about his secret loans from his bank.

“We are committed to putting in place measures to try and ensure nothing of this sort can happen again,” Mr Farrell stated yesterday, but how could anybody have any faith in this promise, when officials at IFSRA did essentially nothing about those loans when they were informed about them in 2007? We need to know how and why IFSRA failed so spectacularly.

The relationship between IFRSA and the banks was much too cozy. Changing to a rules-based, instead of a principles-led system would have complications of its own. Such a system did not prevent the Enron scandal in the United States.

Mr Farrell did not assert that new legislation is necessary; he merely suggested that it might be needed. There should be no grounds whatever for bank officials borrowing money for bank shares from the bank they manage. If such behaviour is not illegal, it should be made so, because it reeks of stock manipulation.

More extensive regulations are now imperative with the six banks covered by the bank guarantee scheme. The re-capitalisation of the Bank of Ireland and Allied Irish Banks should be attempted before trying to nationalise either.