’ s activities. application of supervisory resources proportionate to the economic damage that needs to be averted. this means that some seemingly well - run but systemically important firms may receive more attention than a less sophisticated, but less significant firm. we have developed a comprehensive risk - weighting model, prism, both to do this triage and to define in an orderly way the type of engagement with each firm. continuing to protect the consumer against abusive practices, while ensuring prudential standards. if one could rely on financiers to pursue policies that were socially optimal, much of the supervisory apparatus might be redundant. in fact, however, the incentives of decision makers of the financial firm are not well aligned with public policy. the willingness of governments to bail - out failing financial firms and their creditors in the crisis has exacerbated the temptation for financiers to take excessive risks. heads they win, tails the government picks up the tab. ( to be sure, this is not the whole story. the very topmost irish bankers have lost much – wealth because of shareholdings, status, continued salary income at the very high rates that were prevalent before the bust, and so on. it was not only with the government ’ s money that they took risks ; but the losses assumed by the government have been the largest part. in ireland, more than half of the prospective financial accounting losses will have been borne by the government, with the remainder representing loss of shareholder value and haircuts on subordinated debt. but, in ireland and elsewhere, banker compensation has not been well - aligned with long - term performance, whether measured narrowly by shareholder return, or – as is more relevant from the regulator ’ s perspective – with the wider welfare of society as a whole ). getting the overall incentives facing decision makers in financial firms right – ultimately more closely aligned with public policy – is an elusive goal which is also being pursued at international level. it is the structure of regulation, taxation and resolution policy that can bridge the gap between private and social objectives here. for the most part, irish regulations are defined by those adopted by the eu which in turn is coloured by the wider decisions at the level of the ( international ) fsb. in just a few cases we have decided to go beyond this and required “ super - equivalence ” where local circumstances of the industry seem to warrant it. ( examples here include requirements pertaining to the number of independent non - executive directors and capital surcharge

patrick honohan : philosophy of regulation and supervision closing remarks by mr patrick honohan, governor of the central bank of ireland, at the central bank of ireland stakeholder conference, dublin, 27 april 2012. * * * let me begin by thanking all the participants in today ’ s conference, for your contributions and your interest in our work. this has been the central bank ’ s first public stakeholder event on regulation and we have tried to involve a wide spectrum of participants and guests. we take this wider perspective on stakeholder engagement because the financial crisis has impacted significantly on all sectors of irish society and greatly increased public awareness of, and interest in, financial supervisory issues. the bank has taken other stakeholder initiatives over the past 12 months including launching a dedicated stakeholder eu and international website portal and providing regular updates on developments. we have been remarkably fortunate to have had the participation of the chairs of all three of the european supervisory authorities, andrea enria of the eba, steven maijoor of esma and gabriel bernardino of eiopa, and as if that wasn ’ t enough, an especially absorbing speech by adair turner, chair of both the uk financial services authority and of the fsb committee for supervisory and regulatory cooperation. in closing today ’ s conference, i would like to say a few words about our approach to supervision here in ireland. our financial regulatory policies and practices are probably clear enough, given the number of policy statements, consultation documents and so on. but i am sometimes asked for a characterisation of our regulatory philosophy. after the crisis broke, it was clear that three major challenges faced irish financial regulation : these relate to facts, philosophy and resources : the objective circumstances and condition of the financial system were difficult, the policy approach to regulation had failed and the resources applied to supervision were manifestly inadequate. first was the condition of the banks, with looming hard - to - measure, but evidently large credit losses in prospect. as i have previously remarked, when the banking system wakes up to its misapprehension about a systemic bust, not only does it become clear that the level of prospective loan losses is way beyond historical experience, but the range of uncertainty about the eventual amount that can be recovered from loans made into the bubble – and therefore the loan - losses that will need to be provided for – becomes radically wider. normal loan - loss projections become almost useless. in one of the worst ever banking crises in history, this effect can hardly be overstated