REPORTS ARE SURFACING this morning that legal cases are going to be pursued against the Financial Regulator here in Ireland.

My advice would be to save what money you have left. There is no doubt that the office was incompetent and negligent. There is absolutely no doubt that it was wilfully asleep on the job but it will point to numerous similar incidents, historical and far more recent, and hide behind them.

I’ve said it before, central banks and financial regulators are typically very poor. Nothing seems to change. We are supposed to learn from history and not continue repeating those same mistakes time and time again. Financial regulation is the hot potato that nobody wants to hold on to. It gets passed around, nobody really wanting the responsibility and then eventually gets dropped. That is what has happened in Ireland time after time.

Those considering such action should rethink and take individual action against the banks where they think there has been wrongdoing. An action against the Regulator, although warranted, would be a waste of time and money.

Knight in shining armour

On the other side of the Irish Sea, the Bank of England presided over a number of financial crises before the Financial Services Authority was heralded as the knight in shining armour. After the last crisis, the Bank of England is back in charge.

Why on earth would anything be any different?

At a meeting last week at the Lord Mayor’s banquet at Mansion House the Governor of the Bank of England defended the Bank of England’s new regulatory powers. The Financial Policy Committee met for the first time last week and will publish their first report this Friday, 24 June. Paper doesn’t refuse ink and I’m sure that the report will be well written, have the right emphasis, contain all the right messages but as is evidenced by history the only thing that really matters will be its implementation.

As in the past, my fear is that the poacher and gamekeeper will be operating on completely different intellectual plains. Banks will continue to bamboozle and deceive and we will be no better off.

Doused in petrol and left to burn

At the meeting some insight was given to what may happen to the part nationalised banks in this country. Many will want them doused in petrol and left to burn but the plans are very different.

Northern Rock, the bank that was the first victim of the financial crisis is going to be re-privatised in England by the end of the year. Treasury sources have indicated that they expect the sale to realise around £1bn for the exchequer. Images of the queues outside of the Northern Rock branches and the chaotic collapse of the bank was a prequel to all that was about to happen to Ireland. The so called bad bank has 70 branches,
retail deposits of £16.7bn and mortgage loans of £12.2bn.

Deutsche Bank, which is advising UK Financial Investments, the body that looks after the taxpayer’s stake in banks, has said that by auctioning off Northern Rock it could earn twice as much as by mutualising it. Northern Rock will likely find suitors that are interested in acquiring the remains of a bank that racked up £44bn of mortgage lending.

I’m not sure that it will be so easy here in Ireland.

Banks must be allowed to fail

One important shift in attitude as the crises are slowly consigned to memory is that banks must be allowed to fail. The British Chancellor made it very clear that all banks should be allowed to fail safely without affecting vital banking services and that this should happen without imposing costs on the taxpayer. He went on to say that it should be consistent with EU and international law and that it should happen in a
manner applicable across the sector.

Some solace that it won’t end up costing us in the future but a slow-burn solution to our current problems nonetheless.

Other recommendations from the meeting were in the right direction but still appear incomplete.

Ringfencing the retail divisions of the universal banks is definitely required, regardless of the costs to those banks, but it fails to realise that mortgage lending is often more dangerous than investment banking. Certainly in the case that we have experienced recently, where liquidity problems have been compounded by large scale default. There is no example more obvious than that which we have seen here in Ireland.

British Chancellor George Osborne also acknowledged that a bail-in system should replace bailouts. Debt should be transformed into equity in a crisis, thus recapitalising the bank by hurting security holders, not taxpayers.

All steps in the right direction. Little bit late for the problems that we currently experience but let’s hope that this is the first time that we learn from financial history and not allow it to repeat itself.

Had these measures been in place, I have no doubt the impact on this country would have been far less severe. I don’t see the Irish regulator leading but we should be looking to follow.