In
May 2003, the Financial Regulator under the branch of the Irish Financial
Services Regulatory Authority (IFSRA) was established as the single regulator
of all financial institutions in Ireland.
But by 2004, Patrick Neary was
already in trouble. BaFin, the German
regulator, alerted the Irish Financial Regulator that Sachsen bank’s Irish
subsidiaries, Georges Quay and Ormond Quay, were engaging in unsafe transactions
valuing up to €30 billion. However in
2007, the Irish Financial Regulator ignored previous advice given and permitted
an additional Sachsen investment vehicle which was listed on the Irish Stock
Exchange. In the succeeding two months a
€17.3 billion bail-out from the German association of savings banks was
required in order to keep Sachsen financially solvent. The German regulators disagreed with the
Irish Financial Regulator over who was accountable for the liquidity problems which
had occurred. No regulatory action was
taken by either the German regulators or the Irish Financial Regulator.
According
to Honohan (2009), the Financial Regulator disregarded the actions of Anglo
Irish Bank and promoted hands-off regulation to support the growth of a
financial services industry in Dublin, the IFSC. The Chairman of Anglo Irish Bank, Sean
Fitzpatrick along with other directors, concealed significant personal loans of
up to €87 Million by provisionally transferring them to other Irish financial institutions subsequent to the accounting year-end and then by
pre-agreement transferring the loans back into Anglo Irish instantly after publication
of annual accounts. Subsequent to Neary’s
early retirement in 2009, reports materialised which implied that the Financial
Regulator may have been aware of this loan scandal for up to eight years
previous to their announcement and no regulatory action was taken.
In
2008, the Financial Regulator maintained that bad lending by Irish financial institutions was not related to the global crisis which was unfolding. This he stated was all about liquidity. Neary maintained that Irish banks had sufficient
capital in order to absorb losses on property loans. “Irish
banks are resilient and have a good shock absorption capacity to cope with the
current situation”. (Patrick Neary, Chief Executive, Irish Financial
Regulator, September 19, 2008). This was
quoted two days after the collapse of US investment bank, Lehman Brothers. Two weeks later, all deposits and liabilities
of Irish Financial Institution’s were guaranteed by the Irish Government.
The
Financial Regulator was aware of customers being overcharged in foreign
exchange fees by Allied Irish Bank in 2001 however neglected to take any action
for a number of years. In 2005, the
Financial Regulator neglected to notify an Oireachtas inquiry about their own
investigation into the AIB scandal in 2002 and misleadingly implied that they were
not aware of AIB’s overcharging until 2004.
The most worrying point however, is that this practice of overcharging
customers could have occurred for the foreseeable future if it had not been
uncovered by a whistleblower.
Neary
was condemned by the public for his “light-touch” approach to regulation. Bank executives in Irish financial institution’s
had no incentive to be risk averse as they were paid colossal bonuses during
the good times and in bad. So where a
financial institution had made losses, the chief executive of the financial institution
still enjoyed huge bonuses although the bank was declining. If more stringent regulation had been put in
place, whereby chief executives only received bonuses where financial institutions
made a profit, this may have incentivised the directors of these institutions
to perform better. Patrick Neary
effectively, had his “head stuck in the sand” when it came to regulation.
Sources:
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