patrick honohan : institutional reform in the central bank of ireland since introductory statement by mr patrick honohan, governor of the central bank of ireland, at the oireachtas banking inquiry, dublin, 15 january 2015. * * * the report that i submitted to the minister for finance in may 2010 entitled the irish banking crisis : regulatory and financial stability policy 2003 – 8 responded to a request by the then minister for a “ preliminary investigation of … the performance of the respective functions of the central bank and financial regulator ” over that period. drawing on internal files as well as interviews of key officials, the report was able to provide answers to two questions : first, why was the danger from the emerging imbalances in the financial system that led to the crisis not identified more clearly and earlier and headed - off through decisive measures? second, when the crisis began to break, were the best containment measures adopted? the report noted the relevance of factors other than the performance of the central bank and financial regulator ( including the performance of directors and senior management of the banks, as well as their auditors and accountants, as well as pro - cyclical elements of government policy ), but, in line with the terms of reference, it focused on the design of microprudential aspects ; the approach to overall financial stability ; and the failure to undertake decisive and effective remedial measures. as far as micro - prudential policy is concerned, the supervisors did not accumulate enough relevant information, because of 1. an excessive reliance on a regulatory philosophy that implicitly trusted that wellgoverned banks could be relied upon to remain safe and sound. this approach emphasised process over outcomes, and downplayed the quantification of risk ; and 2. deficiencies in skills and staff resources. there should have been a greater degree of intrusiveness and assertiveness, and a less deferential approach to the banking industry. this would have disrupted the pattern of inconclusive engagement with the banks, a pattern which spilled over to the macro - prudential arena, reflected in the fact that the belated and relatively modest tightening in 2006 of capital requirements for high loan - to - value mortgages was adopted only after prolonged and agonised debate. in terms of the analysis of systemic risks, the language of successive published financial stability reports was too reassuring : a triumph of hope over reality. much has been made of the institutional separation of the regulatory authority from the rest of the

not strictly the topic for today ’ s hearing, it seems appropriate to include some words on this. institutional reform in the central bank since 2009 the 2010 legislation ( central bank reform act 2010 ) confirmed the reintegration of the regulatory and supervisory apparatus fully within the central bank. the separate authority was abolished and its powers transferred to the renamed central bank commission, with most regulatory powers delegated to the deputy governor ( financial regulation ). the legislation also introduced some other changes including a clearer definition of the goals of the central bank. extensive actions were launched to enhance the central bank ’ s capacity and ensuring its delivery of an intrusive and effective risk - based financial supervision as well as a pro - active approach to systemic financial stability policy. these have been addressing, inter alia, the identified issues of insufficient cooperation and limited communication between different divisions and sections, an unduly hierarchical structure and deference to authority and a reluctance to carry decisions to conclusions and effective action. there have been significant changes in the policy approach. for example, banking is no longer de facto exempt from enforcement actions as it was in practice before 2008 : banks now know that regulatory breaches leave them open to penalties. thanks to the new legislation the central bank ’ s focus is no longer blurred by the potentially conflicting objective of developing the financial services industry. substantial expansion of staff on supervision and regulation ( responding not only to objective assessment against comparators that more staffing was needed but also to public demand that underachievement could not be at the time of the report, only a broad indication of the potential fiscal costs could be attempted, given the unprecedented scale of troubled loans and the fact that so few had yet been worked through ( only a handful of nama ’ s loan purchases had been priced ), and other complexities. even now a precise estimate is not yet possible : current valuations of the state ’ s banking shares suggesting a figure for the net long - term fiscal costs of bank recapitalisation of the order of 22 per cent of 2008 gdp may be compared to the “ in excess of 15 per cent ” mentioned in the report. ( the latest figure is still within the maximum of the range that i conjectured at an oireachtas committee hearing in the summer of 2009, before i became governor ). bis central bankers ’ speeches tolerated ). this included injecting new energy and a fresh approach by opening up the numerous senior appointments that needed to be made to candidates outside of the bank