The Central Bank has proposed to intervene in “poorly thought through” commercial decisions made by the banks under its new “intrusive” approach to regulation.
As part of measures to beef up its resources, the Central Bank is on track to increase its staff numbers by 150 to 1,300 this year, with a further 150 to 200 staff additions planned over the following two years.
It yesterday promised to be "tenacious, but not pig-headed" in defence of the public interest in a bid to stave off future financial crises.
In the new hands-on era of banking supervision, financial companies will be categorised according to the systemic risk they pose to the economy. A system of early warning triggers, or red flags, will be developed to prevent a repeat of the banking meltdown.
The Central Bank is planning sweeping changes in response to the regulatory failures highlighted by new Central Bank governor Patrick Honohan and the economists Klaus Regling and Max Watson.
It will set up a specialist team to examine the business models employed by financial companies for signs of risky practices.
Under proposed new corporate governance rules, bank officials who do not meet fitness and probity standards may be subject to suspensions of up to six months and orders prohibiting them from carrying out particular functions.
It is expected that the Central Bank's new approach will involve intervention by the regulator when it deems that commercial decisions made by banks are imprudent.
"Where the stakes are sufficiently high we will second guess commercial decisions as it is clear that poorly thought through business choices can later morph into prudential problems," the Central Bank said in a document circulated to banking executives yesterday.
One such intervention may be made if banks press ahead with reported plans for "negative equity" mortgages. Under such loans, people who owe more on their mortgage than the value of their properties can switch the negative equity part of their existing mortgage to a new mortgage when they move house.
"I think we would look at those products with some scepticism," Jonathan McMahon, the Central Bank's assistant director general for financial institutions supervision.
Mr McMahon added that failure to improve lending standards and examine its controls on consumer credit after the bubble-and-bust cycle of property prices would be "unforgivable".
A review of the credit practices in new mortgage lending will be published next month and is expected to recommend tighter controls.
"It is very difficult to have a soundly based financial system if people are in so much debt. That just creates an enormous risk for the banks. It also clearly creates risks for households and consumers if they can borrow to that extent," Mr McMahon said.
"We have to contemplate doing some things that maybe sit slightly uncomfortably with the free market approach of the past," he said.
The Central Bank has identified four major areas where its supervision will immediately focus. These are new credit standards for mortgages, remuneration policies at banks, risk management and general bank strategies, including their funding models.
Banks that have been slow to change their internal culture on key issues such as remuneration and that are otherwise failing to get to grips with past failures will act as "a drag anchor on the recovery of public confidence in the wider banking system", said Mr McMahon.
"There are still some laggards out there," he said.
It is hoped that "deeply problematic" business models, such as those at Quinn Insurance and Anglo Irish Bank, will be identified at an early stage by the regulator's new team of prudential analysts.
Under a proposed new system for assessing risky behaviour by the banks, it is proposing to categorise financial companies as high, medium-high, medium-low and low risk on indicators such as their level and quality of capital, liquidity, size of deposits and lending practices.
The Central Bank indicated yesterday that the recapitalisation of the domestic banks was proceeding as expected and that "no material concerns" had arisen from its preliminary assessment of foreign-owned banks based here.
