The financial regulation fiasco

THE news that in 2008 Irish Nationwide Building Society made a loss of €€243 million, incurred a loan impairment charge of €€464 million and has debts of €2.23 billion maturing this year is another shocking indictment of a dysfunctional, complacent financial regulatory system.

Irish Nationwide cannot continue as a going concern without government intervention and it is very debatable if this course of action should be even contemplated.

The function of a building society is supposedly straightforward. The sole objective, as a mutual, or friendly society, is to use the funds raised from members exclusively for the benefit of members — typically the provision of loans to purchase a member’s main residence; an enterprise normally bearing a moderate, dispersed level of risk.

Why was Irish Nationwide and EBS allowed by the Financial Regulator to depart from this traditional, specialised, role to become a speculator’s bank, through lending money that was raised on international wholesale markets? This diversion has proven to be extremely risky, not consistent with the tradtional mission of a mutual society and culminating in huge losses in both instances, that are unsustainable by these societies. If the Irish Nationwide had been adequately supervised it would have been obliged to meet high standards of corporate governance that would not have facilitated directors’ emoluments of close to €€20 million over the past decade, or a pension fund for the benefit of its founder that many would consider mind-boggling.

The same feckless approach to financial regulation has encumbered Ireland with private sector credit amounting to almost €€400 billion — 217% of GDP energetically promoted by the nomenklatura of the financial services industry when the “party” was in full swing. The sustainability of private sector credit of even 100% of GDP would even raise concerns.

Inadequate regulation enabled Irish Nationwide to not alone engage in exotic speculative commercial lending but to base the bulk of its business on this. There has been much hype about the systemic importance of the covered institutions to the stability of the economy and reputation of the country.

I am not convinced that the venality of this episode of egotistical self-indulgence needs to be repaired by the put-upon taxpayer.

Myles Duffy

Glenageary

Co Dublin