The pre-crisis attitude of Ireland’s financial regulator was summed up in 2010 with six damning words: “Walk softly and carry no stick”. The man who so memorably described the regulatory void that led to Ireland’s catastrophic financial crisis was Patrick Honohan, then the newly appointed governor of the Central Bank of Ireland (CBI).
Professor Honohan has since left the building, as has Matthew Elderfield, the tough-love financial regulator Mr Honohan hired from Bermuda. But the spirit of the duo has made its way with many of their peers from the historic Dame Street building where the CBI was based until 2017 to its shiny new offices in Dublin’s north docklands.
“The regulatory environment has fundamentally changed since the financial crisis,” says Ed Sibley, the CBI’s deputy governor for financial regulation, describing a system that is now “risk-based, intrusive, outcomes-focused and analytically driven and . . . is underpinned by the credible threat of enforcement and enhanced resolution powers”.
The banks under Mr Sibley’s supervision agree there has been a sea change since the crisis, and again since 2014 when the European Central Bank became the final word in regulation for the eurozone’s largest banks.
The CBI’s supervisory staff has grown from 369 in 2008 to more than 1,000 today. Regulators have instigated a risk-based supervision model dubbed Prism along with new consumer protection codes. They require banks to submit radically more data and have created “fitness and probity checks” to make sure bankers are suitably qualified and of good character.
Those changes have been greeted with a mixture of pride and irritation by supervised entities. “When we look at the PRA [the UK Prudential Regulation Authority], the ECB, the CBI — they’re all professional organisations. I think our guys have done pretty well getting up that curve,” says one Dublin-based bank executive.
The banker nonetheless protests at the reams of data demanded by the ECB and the “hard-nosed attitude” the CBI took to applications from foreign firms mulling EU offices in Dublin after Brexit. “The CBI had to become the best boy in the class in Europe given that they hadn’t covered themselves in glory [pre-crisis],” he adds.
Mr Sibley is familiar with these criticisms and others, but robustly defends the CBI’s approach. “We make no apologies for remembering that financial crises recur,” he says. “Appropriately strong regulatory and supervisory frameworks have an important role in delivering a resilient financial system that can support the economy and its consumers in good times and bad.”
Brexit authorisations became something of a political football in Ireland, with the minister responsible for financial services at one point publicly questioning how the CBI was dealing with applications from companies — who in theory could bring jobs to Ireland.
Mr Sibley says the CBI had received both positive feedback and challenge for how it handled requests from the “well over 100” firms seeking EU market access after Brexit. “Our gatekeeping role is hugely important in mitigating financial stability risks, and protecting market integrity and customers in Ireland and across Europe,” says Mr Sibley. “It is imperative that any new business authorised here as a result of Brexit meets the high standards that are expected of any such firm authorised in the EU.”
Joe Gavin, head of financial services at Irish law firm ByrneWallace, says that while there was “frustration” from some firms about how the CBI dealt with their authorisation requests, Ireland had earned a name as a “strong peer within financial regulation in Europe”.
“In terms of reputational risk for the firms, it’s seen as better than other smaller jurisdictions,” he adds.
In a further sign of the esteem with which the CBI is held internationally, its current governor Philip Lane is the sole candidate to become the ECB’s next chief economist, while its deputy governor for central banking Sharon Donnery was narrowly pipped to the post last year to take over as chairperson of the ECB’s Single Supervisory Mechanism, which regulates the eurozone’s largest and most complicated banks.
All this is a far cry from the pre-crisis era, when a property crisis led to state takeovers of the country’s biggest private lenders and forced the country into a sovereign bailout and bruising recession. Ireland’s financial crisis triggered widespread disgust over the cosiness between the country’s bankers and government officials — including those at the central bank.
One of the first things to change following the collapse of the housing bubble was to appoint a person from outside the finance ministry as governor for the first time since the central bank was established in 1943.
A change in the law also brought regulators closer to the core of the bank’s structure to enable better communication with economists — and the central bank’s mandate to promote Ireland as a financial services centre was removed.
To tackle cronyism, the central bank has also been monitoring the culture of the finance industry — including its lack of gender balance. The bank produces annual statistics looking at applications for top financial positions based on gender, age and country of origin.
A more diverse workforce will, Mr Sibley asserts, lower the chances of groupthink contributing to the next financial crisis.
Get alerts on Central Bank of Ireland when a new story is published