Serious criticism of the role of the Central Bank in overseeing the financial system will be contained in a major report by the bank’s governor Patrick Honohan which is published this week.
In a significant and surprising move, Honohan will also comment on the government’s decision to grant a blanket guarantee on bank liabilities in September 2008. He will say that a widespread guarantee was needed, but will question whether it should have been extended to all classes of bond investors in the banks.
This part of the report looks set to reignite the debate about the government and regulator’s role in the run-up to the crisis, and when the guarantee was granted in September 2008.As widely expected, the report will be highly critical of the Financial Regulator, saying that it was much too lax in exercising its functions, failed on occasion to follow through on directives given to the banks and moved too late to try to impose new rules to ensure the banks held more capital.
However, in addition to this, Honohan will also criticise the Central Bank, which was then a separate entity to the regulator.
Drawing from its annual financial stability reports, designed to look at the banking sector, Honohan will point to how the bank repeatedly failed to spot the danger signals emerging as banks ramped up lending using cash borrowed overseas. As late as autumn 2007, these reports said the sector was stable and had provisions to meet any likely losses.
Seeking to put this in an international context, Honohan will also highlight how reports on the global financial system from the International Monetary Fund also failed to spot the warning signs.
Honohan’s is one of two reports to form the basis for a commission of inquiry into the banking crisis. Sources said it was much more substantial than the other report, by Klaus Regling and Max Watson.
In a lengthy and hard-hitting report, Honohan attempts to complete the investigation of many of the key issues, leaving limited work in this area for the commission.
Despite not being asked to look at the granting of the bank guarantee itself, sources have said Honohan’s report does comment on this. He is believed to conclude such was the stress on the banking system that a wide guarantee on bank liabilities was justified. However, sources have said that he will question whether the government should have included some subordinated bond holders in the guarantee. These are bondholders who get higher returns for accepting more risk, and the state has faced criticism for guaranteeing their liabilities.
Honohan may also conclude Anglo could have been nationalised on the night of the guarantee, instead of a few months later.
Honohan will heavily criticise the bank boards, whom he will identify as being primarily responsible for the sound operation of the institutions and for they way they incentivised management to chase short-term profits with little regard for risk.
He will also criticise bank auditors for their failure to spot some malpractices.
Banking Collapse Reports Out - Regling & Watson and Honohan - Link Here at 4.30 p.m.
Reply With Quote
Originally Posted by C. Flower
Bookmarks