ANALYSIS:Unlike regulators of the past Patrick Honohan is a sheriff with many deputies to call upon, writes LAURA SLATTERY
“I WORRY more about the England football team at the moment than I do about the Irish financial system in terms of sleep deprivation,” says Jonathan McMahon, the Central Bank’s English assistant director general of financial institutions supervision.
He has his priorities straight; he’s just confident that there are “no material concerns” with the ability of the banks to meet their liabilities, even if property prices sink lower and unemployment surges higher than expected.
The stress tests in the regulator’s prudential capital assessment review published earlier this year have accounted for such pressures.
“It could all be over on Wednesday though,” McMahon sighs, before adding quickly: “That’s England’s participation in the World Cup.”
There is no fresh financial Armageddon pencilled in for this week.
The briefing on the Central Bank’s all-new approach to banking supervision quickly abandoned the disappointments of South Africa and returned to more serious matters, such as the contents of its review on financial sector remuneration, due later this year.
What some pundits claim about the England football team, many observers feel is true about the senior echelons of the banking sector: there were just too many disincentivised millionaires knocking about.
For McMahon, a clean-up of the bonus-driven remuneration policies of the past are integral to the entire project of moving away from the go-go capitalism embraced by the banks at the cost of their own destruction – and ours. “It’s really the thing that tells us whether the banks want the change and are changing,” he says.
It is not a bonus-free world that the Central Bank envisages, per se. Rather than maintain incentives for risk-taking, why not have incentives for prudent management of funding, it suggests.
Such suggestions would have been laughed off in the days of copycat development loans and unchecked client portfolios. But these days, not many people talk about the risk of being too conservative when it comes to banking.
Yesterday’s report, simply titled Banking Supervision: Our New Approach, is the Central Bank’s blueprint for its new regime. There is a new sheriff in town: governor Patrick Honohan. And, unlike the under-resourced regulator of the past, he has many deputies.
Three steps down the ladder from Honohan – and two steps down from head of financial regulation, Matthew Elderfield – are two new lieutenants named yesterday. Shane O’Neill has been appointed head of retail banks supervision, while John Moran will be his counterpart on the wholesale side. The next tranche of appointments will be announced next week.
The regulator is keen to dispel the notion that its new army comprises failed bankers who are biding their time in the public sector. Some, at least, have taken pay cuts to work at the new-and-improved Central Bank Commission because the public service mission represents more than adequate compensation.
Getting its mix of specialist staff right is critical to its whole endeavour. A new prudential analytics unit will be unleashed upon the multiple business models of the banks with new forensic intensity. The kind of in-depth critiques that were beyond the old financial regulator will be deployed, with a snazzy “risk dashboard” introduced for each institution so that no warning lights go ignored.
After all, it’s likely that the next crisis to emerge won’t resemble the last one, but will be an altogether different monster, lurking on the balance sheets.
McMahon admits that there is “a grudging resentfulness at times” in certain quarters of the financial sector as a result of the regulator’s new focus.
Hopefully, the “dear CEO” letters that will be dispatched whenever the regulator identifies industry-wide infringements of sound business practices will concentrate the mind. If not, the regulator has plans for suspensions, prohibition orders and plans to impose limits on consumer credit and sectoral exposures in its back pocket.
Like the England football team at this point in time, the Central Bank still has everything to play for.