patrick honohan : regulatory policy development and new regulatory activity introductory statement by mr patrick honohan, governor of the central bank & financial services authority of ireland, to the joint oireachtas committee on economic regulatory affairs, dublin, 15 december 2009. * * * mr patrick honohan was accompanied by martin moloney, secretary to the financial regulatory authority, and joe doherty, head of the central bank ’ s legal unit. i would like to highlight a number of key areas which currently dominate regulatory policy development and new regulatory activity. 1. resolving the crisis first and foremost in the magnitude of its impact is the resolution of the current banking crisis. the weakened financial position of the banks and the extensive government guarantee provided to their depositors and other claimants clearly calls for exceptional measures here. there has been greatly intensified and, indeed what has been termed, “ intrusive ” supervision of the operations of the main banks covered by the guarantee. 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. the government ’ s crisis resolution strategy involves cleaning out a very large block of troubled property - related loans from the banks ’ balance sheets and replacing them with nama bonds guaranteed by the government. this will ease the banks ’ ability to mobilise funds for their ongoing operations. at the same time, since these loans are to be purchased by nama at “ long - term economic values ” ( not far above current market prices ), the purchases will serve to crystallise losses on the banks ’ books in amounts likely to be in excess of the provisions already taken. this is likely to give rise to a need for measures to increase the banks ’ cushion of capital, needed to absorb any future losses. to the extent that needed capital cannot be sourced by the banks themselves, the government has indicated that it will be prepared to make the necessary investments. quantifying the needs and the possibilities is an important task here in which the regulatory staff are centrally involved. 2. ensuring safe and sound finance quite apart from this problem of crisis management, there is the ongoing task of ensuring the safe and sound operation of financial firms in ireland, both those dealing with the domestic market and those primarily concerned with the export of financial services through the ifsc. some of this safety and

information on the past conduct of staff including internal disciplinary action and any other information relevant to the candidate ’ s fitness and propriety. this initiative will help to prevent the problem of staff with poor conduct records moving from firm to firm based on anodyne references. aligning incentives with good conduct it is now widely recognized that in the lead up to the crisis, bonuses were too closely linked to short - term revenues, with little weight placed on the longer term risks to the firm. these pay structures incentivized excessive individual risk - taking and left shareholders and ultimately tax payers to absorb huge losses and incur misconduct fines when risks crystalized. moreover, contract theory tells us that high powered incentives work best when outcomes are easily measurable ( such as sales targets ). but more senior roles involve managing many unquantifiable but very important outcomes – such as reputation and risk culture. in the united kingdom, we have taken the following actions to incentivise individuals to consider the longer - term health of the firm : remuneration rules require a substantial portion of bonus rewards to be deferred for up to 7 years for senior managers. this allows for malus ( the reduction or cancellation of unpaid bonus awards ) and clawback ( a contractual agreement whereby the staff member agrees to return paid bonus awards to the firm where risks have subsequently crystallised or instances of individual misconduct have been uncovered ). there is evidence that malus is being increasingly used by firms – malus adjustments within major uk banks has more than trebled from c. £100mn in 2010 to c. £300mn in 2014. in addition, the prudential regulation authority has made clear that it expects firms to use a balance of both financial and non - financial factors ( such as conduct metrics ) when determining pay rewards and that financial metrics should be appropriately risk adjusted. internationally, the financial stability board is taking action to improve the alignment between remuneration and conduct risk and ( during 2017 ) will consult on : supplementary guidance on the use of compensation tools to address misconduct, and recommendations for consistent national reporting and collection of data on the use of compensation tools. documentation relating to remunerations rules can be found at : http : / / www. bankofengland. co. uk / pra / pages / supervision / activities / remuneration. aspx see the bank of england quarterly bulletin 2015 q4, volume 55 no. 4, page 328, chart