Role of the regulator

Bill2673

A thought that struck me watching the Freefall show the other night.

Is it the job of the regulator to tell Banks that their lending growth is too high?

My thoughts would be that the regulator should ensure that the Banks comply with regulations, that they obey the law, that the meet their capital requirements.

Granted, when the bubble was bursting and banks were scrambling to keep afloat, there were regulation breaches.

But, I don't see what the regulation breaches were in the period where lending growth was huge (funding the property bubble). It was simply a question of excessive lending growth, funded by the huge profits they were earning as well as, to be fair, a shift in the attitude to borrowing amongst the public (eg parents using their house as collateral, people using equity from their home to buy another home). But none of that was illegal, or 'irregular'; it was just wildly inappropriate.

As such, my thoughts would be that either its the Central Bank (wearing its hat as being responsible for Monetary Policy) or the Dept of Finance (and minister for finance) who should be fulfilling this role. And really both should be working together, if they are not then what the hell is going on?

Not trying to be smart here, but what I'm looking for here is information, and reasoning based on facts, not emotional responses or inane 'jail the whole lot of them' type stuff. Thanks in advance.

Count Dooku

Bill2673 wrote: »

Not trying to be smart here, but what I'm looking for here is information, and reasoning based on facts, not emotional responses or inane 'jail the whole lot of them' type stuff. Thanks in advance.

Some facts about efficiencies

But the regulator has now placed the recruitment of new highly-skilled risk and supervisory staff at the heart of its reformation plans.

In total, the regulator aims to add 350 employees over the next two years. This will bring total staff numbers at the central bank and the financial regulator to more than 1,400.

What exactly are they all doing when the banking sector that they are watching over is shrinking by the day?

The Bank of Finland -- the equivalent to our Central Bank -- employs just 650 staff and has a much more complex banking system to safeguard. It has also managed to halve its staff numbers since the introduction of the euro, which it says has resulted in "a much smaller IT unit that must manage an increasing volume of systems and data".

By contrast we have almost doubled our staff numbers, many of whom are on an average salary of €80,000 a year.

http://www.independent.ie/business/irish/maeve-dineen-croke-deal-leaves-some-animals-more-equal-than-others-2307861.html

Welease

And yet, people still claim the government are not focussed on creating employment!

Bill2673

It is well known that the public service is overstaffed in many areas. For example, the Irish central bank employs more people today than it did ten years ago when we had our own currency and made our own interest rate decisions.

Thanks for the info lads.

As regards the actual question posed in the OP, whether it was or was not the role of the regulator to dampen down excessive lending growth by banks in ireland btn 2000 and 2007......does anyone have any thoughts on this?

Nijmegen

As I've said elsewhere, finance is a fast moving area and you cannot possibly make everything bad illegal in real time. The job of the regulator ought to be to advise and warn as well as enforce the rules where they are laid down in black and white.

In the Irish example, the regulator should have been warning that banks with over 60 and 70% of their loan books relating to one sector of the economy were well out of line. That warning might have spurred action to cool the whole thing down.

Bill2673

Thanks, and as mentioned elsewhere, my question is about What was the role of the regulator, not what should it or ought it have been.

Nijmegen

Bill2673 wrote: »

Thanks, and as mentioned elsewhere, my question is about What was the role of the regulator, not what should it or ought it have been.

http://www.financialregulator.ie/about-us/Pages/default.aspx

Count Dooku

Regulator understood that light touch regulation was only about hiding critical data from public
Central Bank hid property crash forecast

THE Central Bank buried sensational data forecasting a crash in the property market months before the housing market began to crumble in early 2007.

Last week's report into the banking crisis by Central Bank boss Professor Patrick Honohan revealed that minutes from the bank's financial stability group had shown that predictions of a crash in the market were deliberately left out of a crucial report in 2006.

"It was decided in 2006 to exclude from the main text of the report data and references to a likely 15 per cent house price overvaluation that was contained in a themed research paper," according to Prof Honohan's report.

SkepticOne

I remember that report. 15% grossly underestimated the amount of overvaluation in the market.

From the article:

"The housing report is highly technical but crucially it suggests that Irish house prices were being overvalued by as much as 15 per cent.
"After 2002, the chart shows a divergence between predicted and actual prices, with actual house prices being higher than that predicted by the model.
"As of 2005 Q4, this gap is about 15 per cent," the report warns. The bank did not publish the findings of this research in its key Financial Stability Review report for the year -- its key temperature reading for the Irish economy in 2006."

SkepticOne

Count Dooku wrote: »

Regulator understood that light touch regulation was only about hiding critical data from public
Central Bank hid property crash forecast

I think the journalists may have got that wrong. The report did say that they thought the property market was overvalued by about 15%. On page 31 they say

"Using a bond yield of 4.08 per cent, this model suggests a statistically significant overvaluation of 14.2 per cent as at June 2006 (i.e., where the overvaluation is measured from the current level of the p/e ratio to the level of the p/e ratio corresponding to the highest confidence interval). Alternatively, the overall misalignment of the actual p/e ratio from its equilibrium rate is 39.4 per cent when the current p/e ratio is compared to an estimate of the equilibrium level. These rates compare to 11 per cent and 35 per cent, respectively, which were recorded in last year’s Report and based on 2005Q2 data. The equilibrium retail mortgage rate for Ireland has been estimated to lie in the region of 6 per cent.7 As this rate is an estimate, an area of uncertainty between 5 and 7 per cent is assumed. Assuming the equilibrium rate, the extent of significant misalignment increases to 20.1 per cent and the distance from the estimated equilibrium p/e ratio widens to approximately 45.3 per cent."

Here is the report. However for some reason they choose to emphasise the lowest of these figures at 15% and more or less ignore a chart that they themselves publish in the report suggesting 73 percent overvaluation.