There’s a curiosity on page 97 of the Central Bank of Ireland Annual Report published yesterday. The Governor, Patrick Honohan’s salary is shown as €276,324 whilst the Financial Regulator who reports to the Governor was apparently paid €348,462 and in addition was paid €75,299 for relocation, rent and other expenses. Now why would you pay an underling €150,000 more than the boss? Presumably the CBI might say that it has to pay a competitive salary to attract the best talent. There is a slightly contemptuous stance towards the Financial Regulator on here because it seems difficult to see where the world-class talent is having an effect. But having got “the best” inIreland, what have we to show for it in 2010?
Well at least we still have a banking system. But is that the best that can be said for the activity of the CBI? Let’s examine the results by reference to what the CBI says it is supposed to do
(1) Stability of the financial system; the Bank didn’t do very well at all in an absolute sense. Deposits flew out the doors of Irish banks, the six state-guaranteed ones in particular, this despite the extensive Government guarantee, higher interest rates for depositors, at least two stress tests (one domestic, one European), the commitment to overcapitalise the banks and a 17% increase in staff at the CBI many of whom supervise banks. The financial system was less stable at the end of 2010 than at the start by reference to deposits and capital needs to cushion elevated losses. It is hard to find any metric by which the system was stronger at year end. Competition contracted with the exit of Bank of Scotland (Ireland) and itsHalifaxunit. And moving into 2011, we seem destined to have two pillar banks with the effective disappearance of EBS, Permanent TSB (it seems), Anglo and INBS.
Of course the CBI might point to the elevated sovereign risks that intensified in 2011 withGreece, thenIrelandseeking IMF bailouts. The bank might justifiably point to the higher than expected losses on property lending which were only exacerbated during the year as the property markets continued to dive inIreland. But let’s call a spade a spade here; the stress test in March 2010 was risible in its failure to capture the extent of loan losses and the CBI seeking to offload the responsibility for that under-calculation on others is reprehensible. The CBI should not have added its imprimatur to stress tests unless it was satisfied with the basic data, and banks getting information wrong or NAMA underestimating its haircuts are no excuses for the CBI not sampling the information upon which the stress test was based. The European stress tests in July 2010 were equally risible with AIB seeking a multi billion bailout just three months later, and the CBI should again bear a degree of responsibility for this stupidity.
Of course it is arguable that even if the earlier stress tests identified the final extent of the capital needs then that wouldn’t have altered any action because the sum would be injected by the government regardless. That misses the point that in a democracy, decision-making and prioritisation of scarce resources need accurate information, and if we did know in March 2010 that the banks would need some €70bn of injections, the State might have made different decisions about guarantees. It most certainly would have been better prepared for any bailout negotiations.
At the end of 2010 Irish domiciled banks were dependent on €132bn of funding from the ECB and a further €51.1bn from the CBI. That funding is short term and is provided against collateral, the value of which the ECB may alter at any time. Central bank funding was up 80% during 2010 and as a result the Irish state is now dependent on an outside organisation ruled by a 6-man executive board and a governing council of the 17 governors of national cental banks. And as we have seen in recent weeks, that ECB can threaten to withdraw funding or change the collateral rules. This must be the most serious loss of control which cannot be acceptable in the medium or long term.
Could it have been a worse year for the CBI? Yes, we mightn’t have had a functioning banking system at the end of the year but it’s a pretty poor show when a central bank would need point to the continuing bare existence of a banking system to justify its performance.
Going forward it seems that the CBI doesn’t appear to appreciate the potential value of having one of the most poked and tested banking systems in the world. We all know that there is a slow-burn unravelling of problems with German banks,Britainis far from out of the woods and anyway has quantitatively eased itself to higher, safer ground. God alone knows the extent of the issues inSpain’s banks. And yet here inIreland, we have a small banking system, stress tested three times in the past year, with daily and weekly reporting to the ECB and IMF, in-your-face supervision by a much bolstered CBI, new boards of management in many cases and more stringent corporate governance. Add to that the fact that our deposit rates are higher than the euro norm, we are overcapitalising our banks and we still provide relatively generous state guarantees and you would have to wonder at a CBI that couldn’t capitalise on all of that. I can’t seeIrelandovertakingSwitzerlandas the destination of choice for global banking, but surely our reputation should be better than it is.
(2) Regulation of financial institutions. 2010 wasn’t a bad year for consumer scandals in Irish financial institutions compared to previous years.There was the AIB ATM mini-scandal in May 2011 when it turned out that if you attempted a withdrawal at an AIB ATM and didn’t collect your cash so that the cash was mechanically taken back into the ATM, AIB was still charging you. AIB refunded some €8.7m to customers. It is difficult to say whether or not the much bolstered Financial Regulation function contributed to a better environment as there doesn’t appear to be any metrics by which you could judge performance. The CBI did publish a new code for mortgage arrears during the year which reinforced forbearance measures. Although the intentions were no doubt honourable, it is hard not to conclude however that the CBI is just delaying the inevitable and giving succour to the pussy-footing in government over the reform of personal bankruptcy arrangements. A review of credit unions started during the year.
One area where it seems that the Financial Regulator has been weak has been where mortgages are being restructured, and banks have demanded borrowers surrender valuable tracker mortgages as a condition of getting any assistance. It is still not clear how widespread this scandal has been.
(3) The efficient operation of payment and settlement systems. Well the all-important ATMs worked and CHAPS and SWIFT seemed okay and the mechanics of providing liquidity including emergency liquidity seemed to work fine. Perhaps it is mean-spirited, but the presumption would be that these would all operate efficiently.
(4) The provision of analysis and comment to support national economic development. This is a difficult objective to judge. The CBI got the initial stress test spectacularly wrong. The CBI issued some new information including an overview of bond-holdings in state-guaranteed banks. But having provided the basic totals, the CBI didn’t issue any other detail to assist a debate that rapidly descended into a broad consensus of burning bondholders without any meaningful understanding of the consequences. New information was produced on mortgage arrears and repossessions which show the former ballooning but the latter being artificially contained. There were enhancements to the bread-and-butter monthly and quarterly statistics.
So it hardly seems a world-class performance in 2010 by reference to results. It could have been worse had it not been for the efforts of the CBI but the bottom line is that our financial system is less stable than it was the previous year. Finally it should be highlighted that Governor Honohan volunteered a 20% reduction in his own salary which equates to about €60,000; that sacrifice deserves more attention.
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