patrick honohan : financial regulation in ireland – past, present and future speech by mr patrick honohan, governor of the central bank & financial services authority of ireland, at the financial services ireland annual dinner, dublin, 1 december 2009. * * * this evening i want to say a few words about the past, the present and the future of financial regulation in ireland. as far as the past is concerned, it is conventional to assume that, in the recent words of judge richard posner, applied to the us regulatory agencies in the run - up to their own crisis, “ ignorance and inattention ” were at the heart of regulatory failure. whatever else about that assessment, it hardly represents an explanation. nor is it credible that a few simple rules like “ no 100 % mortgages ” would have prevented the disaster that has occurred. in seeking a deeper understanding of why things went wrong, i have been struck by the disruptive effect in ireland of the attempt to adopt the new international fashion in supervisory practice that emerged in the late 1990s. this new fashion, which later underpinned aspects of the basel 2 standard, involved a shift from scrutinising the accounts, the loan portfolio and other aspects of the books of financial firms, to focusing on procedures and models. the motivation for this shift was the rapidly growing complexity of banking and other financial business, including the use of derivatives and complex hedges. precisely because of the rapidly growing complexity of banks ’ business models, a supervisor who only looked at individual parts of a bank ’ s business ( i. e., their exposures ) on a piecemeal basis, without reference to the correlation of risks across those parts, would have a false picture of the institution ’ s overall risk. in addition, the wider range of instruments being traded and held in bank portfolios meant that, not only could an institution ’ s exposure to market risks change dramatically from day - to - day ( or even hour - tohour ), but there were growing operational risks related to the difficulties of controlling a complex portfolio. this approach envisaged the supervisor standing back from individual transactions and loans. instead, the supervisor looked in a holistic way at the banks ’ systems, at their corporate governance and their risk procedures and models and control structures and confirmed they were in place and in operation. the champions of the this approach rightly pointed to the importance of ensuring that banks had good systems and incentives for remaining safe and sound. there is much

the authorities considered it necessary to make that call. since the nationalisation of anglo irish bank, the regulator here has adopted what has been termed an “ intrusive ” approach to supervision of the main firms. this involves on - site presence on a daily basis by several regulatory staff in each of the institutions covered by the government guarantee. they have been sitting in as observers on key decision - making committees in each of these banks as well as conducting a number of specific investigations and reviews. meanwhile, more recently we have been re - engaging with the business of understanding the portfolios of these institutions in greater depth. the assets going into nama are of course being subjected to an intensive due diligence exercise which the regulator is not duplicating ; our main focus now is on the rest of the business. as you know, the new head of financial supervision, matthew elderfield, will be starting in a few weeks. he brings his own considerable experience and skills to upgrading and restructuring regulation in ireland on a risk - based basis. we are together planning details of the new structures and approaches that will be adopted in what is rapidly becoming a unitary central banking organisation without artificial and unnecessary internal barriers. it may not be sufficiently recognised just how much restructuring and strengthening there has already been. i find that of the team dealing with the domestic banks as many of seventeen staff members – or about half of the total – were externally recruited within the past year or so, with management and staff moved in from entirely different parts of the organisation since the severity of the crisis became evident around the time of bear stearns. the decision, which predates my arrival, to make a fresh start in this area was clearly a sound one. actually, my personal impression is that, while we will undoubtedly continue to be much more hands - on than in the past, the style of engagement currently being practiced, while appropriate now, will probably not be quite the right approach as a supervisory model for the long term. when things settle, as they will over the coming months, we need to make the transition to a more sustainable and effective way of operating, one that is calibrated to the risks posed by the different firms in the sector. this will involve applying the existing rulebook, strengthened as necessary to plug the holes revealed by the crisis, with a renewed clarity of principles that will serve to back - up and amplify these rules to deal with unforeseen loopholes and blockages. in recent years