It was all sorted out very quickly in the end. A two-year stand off between the Tanaiste and the Minister for Finance was resolved at a 30minute meeting in Mary Harney's office last week. Officials from the Department of Finance and their opposite numbers at Enterprise, Trade and Employment waited outside as the Tanaiste and Charlie McCreevy put the finishing touches to a compromise hammered out over the previous four weeks. A fresh initiative from the Tanaiste's advisers in mid-January broke the deadlock. "We decided to put aside the previous disagreements and devise a structure that everybody could sign up to," explained one insider.

The structure of the new regulatory system may have been decided by the officials, but the politics of the sensitive issue were left to the Tanaiste and Mr McCreevy. They had two decisions to make when they sat down at the table in the Tanaiste's office that Thursday evening. First they had to decide on the names of the new organisations' constituent parts, and then they had to agree its description. Was the jumble of boxes, arrows and connecting lines drawn out on the pieces of paper in front of them an entirely new structure or merely a re-organised Central Bank?

The answer to this, a seemingly trivial question, would indicate whether the Central Bank and the Department of Finance had been successful in their two-year campaign to retain control over the supervision of the banking industry. Although the officials had gone to extraordinary lengths not to approach the issue in such terms, in recent weeks there was no escaping the fact that such a simple reorganisation of the Bank would be seen as a political defeat for the Tanaiste.

More than two years ago she commissioned and received a report from Mr Michael McDowell, then a senior counsel but now Attorney General, on the establishment of a single financial regulator. Its genesis lay in a series of regulatory failures and business collapses, the first of which was the absconding of investment broker Mr Tony Taylor in 1996. The Tanaiste had enthusiastically endorsed the McDowell report's recommendation that a new body be set up, completely independent of the Central Bank, but the Department of Finance cried foul. Separating the regulation of financial institutions from the regulation of the monetary system in general was unworkable according to Finance, and a stand-off ensued.

The deal struck between McCreevy and Harney last week was a classic political fudge. There was to be a "new" organisation, but it would carry the name of the old organisation. Thus the Central Bank of Ireland and Financial Regulatory Services Authority (CBIFRSA) was born. The carefully worded press releases from both the Tanaiste and Minister for Finance stressed the new nature of the body, but in reality it is not new at all. Officials in both departments confirmed this week that the legal entity which is currently the Central Bank will become the CBIFRSA. There will be a root and branch re-organisation of the Bank, which is being divided into two pillars, one of which will deal with monetary policy and the other with regulation. The first pillar, called the Irish Monetary Authority (IMA) will carry out the functions that are currently conducted by the Central Bank on behalf of the European Central Bank. The second pillar, the Irish Financial Services Regulatory Authority (IFSRA) will look after prudential and regulatory matters. It will have its own board and chairman, who will have almost complete independence in how they fulfil their mandate. What is confusing about the new set up is the interaction between the board of the CBIFRSA and the two pillars. The chair or Governorship of the CBIFRSA will be held by the representative of the ECB in Ireland, currently the Governor of the Central Bank, who will also hold the chair of the IMA. The IMA will have no real autonomy and will exist to support the ECB representative in the carrying out of his function, including liaising with the Government and controlling the supply of money. It will have a board, of which six members will sit on the CBIFRSA board. The IFSRA will be a very different creature, with its own chairman and board of 10 members, six of whom will also sit on the CBIFRSA board. It is envisaged that the IFSRA will discharge nearly all of its functions without reference to the CBIFRSA and consult with them on a small number of matters related to monetary policy. The proposed level of interaction is so small that it hardly seems to justify the complicated linkages that have been established, but without them there would have been no deal. The convoluted relationship between the CBIFRSA and the IFSRA satisfies the two criteria on which the Department of Finance felt it could not compromise. It provides a channel for coordinating regulation with monetary policy, but more importantly it leaves the Governor of the Central Bank at the top of the organisational tree. This meets the requirement of the ECB that its representative cannot be a constituent of any other body, so as to ensure his or her independence.

The final part of the puzzle was to overcome the need to have the ECB representative at the top of the pile, but make the organisation fully accountable to the Minister for Finance and the Oireachtas. ECB statutes also make it clear that its representative is not accountable to the Government of the day. The solution was more fudge. The Governor will be accountable to the Oireachtas for all his non-ECB functions as head of the CBIFRSA, and the head of the FSA will also be directly accountable. No one denies that the final structure is unwieldy, but the Tanaiste and the Minister for Finance are convinced it will work. The main achievement from the Tanaiste's viewpoint was to give the body a consumer protection ethos - through the inclusion of the functions of the Director of Consumer Affairs as regards financial services industry - creating a one-stop shop for people who have problems with banks, building societies and other financial institutions. The body will have a consumer protection director, who will sit on the board. What will not be clear for some time is whether the new system will prevent the lapses of the past. One of the main faults in the previous system has been rectified: if the FSA comes across irregularities as a result of its routine inspection of banks, it will be able to take action if they are in breach of consumer protection legislation. In the past, the Central Bank has had only very limited scope in this area. The other main flaw in the system still remains: the new body will not be allowed pass information to the Revenue Commissioners, and to the Garda only under limited circumstances. The key to the success of the new initiative will lie with the individuals appointed to the boards of the three organisations and also to the roles of chief executive and consumer protection director of IFSRA. The chief executive and consumer protection director will be appointed on a interim basis before the summer and will play an important role in fine-tuning the organisation's structure as the legislation makes its way through the Oireachtas. The two executives will also have to oversee the integration of the several hundred Central Bank prudential and regulatory staff with staff transferring from Enterprise Trade and Employment. Additional professional staff will also be hired, bringing the complement to around 400, with an annual budget of around £60 million (€76.2 million). All being well, the new bodies will be up and running by the start of 2002. The larger question of accountability and responsibility will not be answered until the system is tested by the next crisis.