Wednesday, 16 June 2010

The Irish banks are called to account

The Central Bank & Financial Services Authority of Ireland has published its report on the banking crisis that has almost overwhelmed the Irish economy. Their account does not make happy reading. Of course the CBFSA is itself implicated in the story of the mismanagement of the Irish economy so this cannot be seen as an entirely independent report but it still makes interesting reading.

One central conclusion of the report is that the macro-economic predictions of the Central Bank and, therefore, the government were hopelessly and utterly wrong before, during and even after the credit crunch began in 2007. What now appears to have been a speculative bubble economy based almost entirely on construction still managed to convince Irish economists of its fundamental soundness even when it was clear that cash funding from the banks was about to dry up. It would be reassuring to imagine that Irish economists were especially incompetent but the CBFSAI, anxious to deny this charge, can point to a 'higher' authority, the Financial Sector Assessment Program of the IMF. As late as 2006 an update for the the FSAP on Irish financial stability could be described as 'relatively glowing'. Apparently the OECD was equally up beat. Ireland had no need to employ its own economists as it could rely on international ones to be equally inept.

Mind you, Ireland did need its own regulators to directly oversee the lending activities and financial prudence of its banks. The account of their work is just as dismal as that of the economists. The report criticizes their methods, which were anything but 'hands-on', and accuses them of getting too close to the banks that they were supposed to be monitoring. Apparently the pay was too low to attract able, experienced staff who could earn far more working for the banks themselves. The regulator struggled on with 'no more than two [staff] per major firm'. Perhaps the shortage of human resources wouldn't have been so bad if their efforts had been probing and incisive but the report is forced to admit that there was not sufficient "intrusiveness and assertiveness" and that 'these might have partly constituted what is described in the literature as "regulatory capture"'.

There is good news, though, in the report's conclusion that 'there is no
evidence or hint of corrupt regulatory forbearance'. There is plenty of evidence of malpractice in at least one of Ireland's major banks and it is a relief to learn that the Central Bank was not guilty of the same but small comfort since the result could hardly have been any worse. Instead, a theme emerges that the regulators, like everyone around them, either could not believe that the Irish economy had no clothes or were not willing to 'spoil the party'.

So finally the blame rests, perhaps rightly, with the Irish bankers, politicians, property speculators and everyone else who believed that they could get rich quick.

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