ANALYSIS:The governor of the Central Bank says it should have paid more attention to contrarians, writes SIMON CARSWELL

CENTRAL BANK governor Patrick Honohan called for an inquiry into the causes of the banking crisis last December. At an Oireachtas committee yesterday he said there may not be a need for a full-blown, statutory commission of investigation, as a lot more is now known.

Honohan’s fear is that the Government’s six-month commission could turn into “a juggernaut” that tries to cover everything.

Elaborating on the major failings of the banks and the Central Bank-Financial Regulator outlined in his report of last week, Honohan referred to the “now famous” inspection by the regulator of five top developer borrowers at five financial institutions in 2007.

It showed up a catalogue of failings in the banks’ risk management. One bank said it believed one borrower, who owed it several hundred million euro, owed a similar amount to another when in fact it owed the other a billion.

“They didn’t know the overall picture,” he said. “What that should have triggered [was] alarm bells, escalation, bank managers carpeted by the regulator and told this was a serious problem.”

Instead there was a 20-30 minute meeting with the bank to consider a report on the issue.

Blame for these failures was due to weak layers of protection – if banks had done their job, there would have been no need for the Central Bank or the regulator.

Honohan said that, in general, people believed that banks which had been around since the 19th century could not find themselves in trouble. The Minister for Finance was entitled to assume that the organisation he created to regulate prudential matters should do its job, he said.

As for the crisis being three-quarters “home-made”, he said that if Ireland was similar to other countries, it would only have endured a one-quarter fall. The tide went out on everyone but Ireland’s rock stands higher, he said.

The Government and the regulatory authorities should have been aware of the huge international borrowing that fuelled the property boom, but “that part of the radar had been switched off”, he said. States were now having to fund the bailout.

“Banks are global in life and national in death.”

The Central Bank should have paid more attention to the views of “contrarians” such as economist Morgan Kelly, he added. There would have been “a lot of push-back” to pro-cyclical policies where more rainy day money was set aside and not spent in the boom.

He defended the Department of Finance against the criticism by Dr Michael Somers that it followed the wrong policies or failed to direct the Central Bank, saying that it was needed as “a bulwark”.

Relations between ministers and civil servants was an issue across all departments.

“I would be very reluctant to see the department isolated as a problem,” he said, adding that everyone liked to bash it.

Asked whether any regulatory staff had been fired, Honohan said he was not about “cutting off noses in spite of faces” and was confident with his supervisors and their good and bad experiences.

Honohan said he made reference in his report to bankers being well-liked in political circles as he felt he had to give some flavour of “what I know, everyone knows and everyone in the regulator knows”.