I welcome Mr. Robert T. Moynihan, who is a regulatory consultant. I draw his attention to the fact that members of the committee have absolute privilege but the same privilege does not apply to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against any person outside the House or an official either by name or in such a way as to make him or her identifiable. I propose to hear a presentation by Mr. Moynihan, to be followed by questions from members of the committee. As in recent meetings, I will allow members to ask one-to-one questions directly.
Better Regulation: Discussion with Robert T. Moynihan.
Mr. Robert T. Moynihan
I hope the PowerPoint presentation I am about to make can be seen by the members of the joint committee. I have a background in chartered accountancy, but I have not been in practice for 20 years. I have qualifications in securities, trading and investment management. I am a qualified corporate treasurer. I have a master's degree in financial regulation. I will talk about that in a few moments. I left Ireland in the 1980s, when things were grim. I spent six years in Sydney and 12 years in London. I came back to Ireland six years ago. Since then, I have been independently running my own business, which provides training, consultancy and teaching in compliance and regulatory matters in the UK and Ireland. I teach a number of university courses in the UK. I have taught in the National College of Ireland and in the Institute of Bankers in Ireland. I teach the "theory of regulation" module that forms part of the institute's master's degree in finance and risk management. I am a former member of the Financial Regulator's industry consultative panel. The various qualifications I hold are listed on the screen that can be seen by the members of the committee. I am proud to show them to people. I am particularly proud of the last qualification on the list.
When I am trying to help my clients to comply with their various regulatory obligations, I tell them I am a passionate believer in the highest standards of compliance and regulation. One of the common problems I encounter is that people see regulation as no more than a set of laws, rules and red tape. They do not see it as extremely important for the running of our society. When I go into a bank, a life company or a credit union to talk to members of staff about compliance and regulation, I know they would prefer to be going to the dentist than listening to me talking about financial regulation and training them in compliance and regulation. I explain to them that the regulation of the aviation industry is a matter of safety. When I ask them, they always agree that compliance with the highest standards of aviation regulation should be required. Similarly, the need for food standards regulation is self-evident. The need for financial regulation is a much more complex issue. Most people, in financial institutions and among the general public, do not understand it. Compliance has a bad image among those who see it as a combination of laws, rules and red tape. As I have said, I passionately believe in the highest standards of regulation and compliance. My main line of business is consultancy to all types of financial institution, including banks, life companies, securities companies, brokers and hedge funds. I am acquainted with the systems of regulation in Ireland, the UK, Australia and elsewhere. I provide risk management services of all types to credit unions.
I will make a number of points today, assuming this session goes how I expect it to go. I do not propose to go through each of the ten points I set out when I wrote to the joint committee a few weeks ago. I will skip on to some of the other points I would like to make. If members wish to ask me questions later in the meeting, I will give them an opportunity to do so. I will make some general points at this stage. It is clear that the global banking system has stopped working properly. Other sectors of the economy are also at risk. I am terribly concerned about the insurance, pensions and private equity sectors, as they will encounter serious stresses in the near future. It is clear that a public policy response to what has happened will come at various levels. At international level, responses may be issued by the EU, the G7, the G20, the International Monetary Fund, the Financial Stability Forum and the Bank for International Settlements. There will also be a public policy response at domestic level.
Some of the problems that have arisen in Ireland in areas like banking supervision have also developed in other countries, including the UK. I suggest that certain other problems, in areas like etiquette, ethics and integrity, are peculiar to Ireland. Although problems have arisen in UK banks like HBOS, Lloyds TSB, Northern Rock and Bradford & Bingley, questions have not been raised in that jurisdiction about people's integrity. While financial institutions in the UK clearly became over-exposed to the property sector and to short-term bank funding, some of the problems that have emerged in the recent past, which relate to ethics and integrity in the way business is done, are peculiar to this country. It is not clear whether the problems in Ireland relate to a design flaw in the regulatory system we have had for the past five years or to an error in how that regulatory system was implemented. Such errors may have arisen at governance or executive levels. If they arose at governance level, there may have been problems in individual boards or in the overall strategy of the Financial Regulator. It is possible that the overall strategy of the Financial Regulator was appropriate, but the manner in which it was implemented by the executive — by Mr. Neary and his staff — was not. I am not making an allegation. I do not have a view on that. I am saying the jury is still out on these complex matters.
The public policy response must be well thought out. It must be discriminatory and must focus on areas in which problems have arisen. Problems have not developed in many sectors, such as the funds sector. No problems have resulted from that sector in Ireland to date. The response must be discriminatory and must focus on problems that need to be solved. It must be minimalist. If we engage in a colossal knee-jerk response that covers the entire regulatory system, we could be in danger of throwing the baby out with the bath water because the problems have a narrower focus. Our response must consider what the Irish banking and financial services systems will look like after this crisis passes. There is no point in trying to find a solution to what went wrong in the past if we assume that solution will work in banking in 2015 or 2018. We need to figure out what banking will look like. It will not look like what it has looked like over recent years. We know banking will change enormously. There is a strong argument for saying that banking, by virtue of the risks posed to society, should be entirely nationalised and run like the ESB or Aer Lingus. I am not necessarily advocating that view, on which we could have a lengthy debate. If we respond to what has happened on the basis of what should have been done in the past, it is possible that we will come up with the wrong answer.
It is self-evident that financial services comprise a critical component of our daily lives. I refer not only to banking and payment systems, but to insurance, securities, investment funds and credit unions. As many parts of the financial system are functioning well, they must be protected and preserved. We need to have realistic expectations about what regulation can and cannot achieve. There is no such thing as zero risk. If something goes wrong, it is argued that the regulator should have spotted the problem and removed risk from the system. This cannot be done. All aspects of life, including financial services, are risky. All a regulator can be expected to do is reduce the likelihood of something major going wrong.
Financial services are prone to instability. We all remember cases such as the PMPA, the Insurance Corporation of Ireland, Barings Bank, Crédit Lyonnais and the Bank of New England. We will always have such cases but it is clear we have never before had something of such a systemic nature as the current instability. The public must accept there will always be instability. If we want to remove risk from the financial system, we will have to nationalise the entire system and run it like a civil service with the taxpayer absorbing the risk. That is not the correct response.
These points need to be understood by all stakeholders in the process. The regulator got things critically wrong and others also have a case to answer, including the banks, governments, the media, both here and elsewhere, other regulators and society in general, particularly in Anglo-Saxon countries. The United States, the United Kingdom, Ireland and, to some extent, Australia got things more wrong than continental Europe. Canada was the exception among the Anglo-Saxon countries.
In respect of the Financial Regulator, top level executives have always been extremely thinly spread. The regulator needs a chief operating officer, a director of regulation and a director of the international sector. Until Mr. Neary resigned, it had a chief executive, a consumer director and a prudential director. The consumer and prudential directors were also responsible for human resources, information technology, finance and administration. For an organisation with approximately 350 staff which is of such critical importance to society its executives were much too thinly spread.
The Financial Regulator should be a stand-alone entity with unfettered control over HR, IT and its operations and should second more personnel to and from industry. While it has been engaged in some secondments, this capacity must increase. This is a tricky issue because while one wants the regulator to be close to industry, it should not be so close that it becomes captured by it and ends up in its pocket. The regulator also needs to pay competitive salaries because it needs to be able to recruit people who understand securities, banking, financial services and know where the bodies are buried and what the risks are in the financial institutions.
Ireland needs greater regulatory expertise. Moreover, regulation needs to be seen for what it truly is as opposed to just a set of rules. I am terribly frustrated when I repeatedly observe that the first step taken when an issue arises in financial regulation is that a lawyer is called in. This is always the wrong answer. There are too many lawyers in financial regulation. Regulation is a coherent, values based set of standards with which industry serves its customers. Lawyers do not get this. They are trained to work on evidence and the law, a particular skill set that has great value in the courts. When financial regulation becomes consumed by lawyers and legal processes, it loses its soul, purpose and ability to be a genuine service to consumers.
The Financial Services Authority in the United Kingdom has been promoting a concept known as TCF or treating customers fairly, which was introduced about four years ago. The FSA pumps TCF through everything that happens in Britain's financial services. TCF is much higher than laws and rules; it is about getting standards of integrity, ethics and customer service right. We should have a focused push on getting this through to financial service providers and the way in which they treat their customers.
The office of the Financial Regulator is a fine agency which has many highly skilled staff who deliver excellent service. It is a myth that its officials come to work late and go home at 4 p.m. I have had staff from the office of the Financial Regulator call me about client issues at 7 p.m. and 8.30 p.m. The organisation has made substantial progress since its establishment six years ago. While some critical errors were made, I have no doubt the regulator will learn from them — it would be crazy if this were not the case.
As one would expect, there are other areas in need of improvement. Wholesale changes should be made only where it is clear that the response addresses how and where errors were made and reduces the risk of their being repeated, while minimising negative or unintended consequences. As legislators, members will be aware that one of the constants of life is the law of unintended consequences. We must ensure we minimise such consequences when we think through our response. In Australia a body known as the Wallace commission studied the country's entire regulatory structure for about three years and produced a response which resulted in the establishment of a highly proficient regulatory structure, probably the second best such structure in the world. However, it still had unintended consequences, which are inevitable.
The United Kingdom, with its enormous financial centre in the city of London, first established a regulatory system in 1986. Before then, UK legislation in this area was highly fragmented. Many things went wrong in London in the 1990s and I was neck deep in many of them. New Labour under Tony Blair and Gordon Brown redesigned the landscape and established the Financial Services Authority when it came to power in 1997. Even now, the British Government is having another look at the system. While it is not a matter of shame that we, in Ireland, did not get it right first time, we must get it right the second time.
I welcome Mr. Moynihan to the joint committee. I will first make a number of basic, broad points.
We are witnessing how capitalism is being redesigned. I do not say this in an ideological manner. The Anglo-Saxon model to which Mr. Moynihan referred has been effectively turned on its head. We are still in a state of flux and no one knows what new model will emerge from the current system. We have the Japanese and Korean model of capitalism, the Anglo-Saxon model and the German model. While Germany has been affected by the financial crisis, it has not been to the same extent as other models. The German federal structure allows for a system of banking which ensures regulation is tight. I ask Mr. Moynihan for his opinion. Could Ireland use the German model? Will he also, in broad strokes, give a view on how we should develop a regulation model which would insure us against shocks such as those we have seen in the recent past? I accept, however, that no model will be perfect.
When the internal auditors of Anglo Irish Bank appeared before the joint committee recently, members sought to question them on loans to directors and the fact that loans could be made to directors with impunity. How do we change relationships between internal audit committees, credit control committees and boards of directors who pass loans of a certain nature? How do we tighten such practices? Regulation is needed to grapple with these issues.
The European Union, in the Jacques de la Rosières report, has produced a set of recommendations. Heretofore, the British were outside the tent in reaching political agreement at EU level on European regulation. This was mainly due to the city of London. It appears, however, that it will, through the Chancellor of the Exchequer, Mr. Alastair Darling, get on board and accept a European model of regulation. Can the Oireachtas introduce legislative measures to ensure Ireland stays on the curve or will the European Union be ahead of the curve? Should we accept the EU model in its entirety? What can we do to ensure our regulatory framework is at least compliant with the European Union model? I would like also to get a sense of what is happening in Europe, if Mr. Moynihan has an opinion on that. I will leave it at that for now because there will be many questions.
Mr. Robert T. Moynihan
In respect of the first question about Germany, obviously that country has its own political and national culture and I do not think we can adopt it. Everything happens differently over there. If one wants a plumber to come at 10 a.m. on a Wednesday in Germany, he will be there at 10 a.m. The way trains and society run, and the interaction between society and the organs of state at a federal, state and individual level is hugely different to our approach. From a societal point of view it would take seven generations for Ireland to merge into that kind of model.
Regulation has to follow the society mode. In Germany, banking regulation is very fragmented. There are approximately 4,000 different banks in Germany between town, regional and state banks, including small, localised building societies that are almost like credit unions. Then they have four or five large banks, namely, Deutsche Bank, Dresdner Bank, Commerzbank and BFG. There are state banks also that have recently been hived off by the state. Germany did not escape the downturn either but its society did not get as over-leveraged in the same way as in the Anglo-Saxon countries. From what I can see, all the problems in the banks have arisen from imported problems, namely, sub-prime debt they bought from the United States. Most of the problems in Deutsche Bank and Dresdner Bank in particular originated from their offices in London and New York. Dresdner Bank is now the largest private owner of real estate in the city of Cleveland because it has had to repossess so many mortgages. I am not sure that is a sensible answer but the regulatory structure in Germany is different from ours; its national culture is different from ours and I am not sure I can find any great lessons for us to learn from there.
In respect of the question about internal auditors, I am a chartered accountant but I have external auditing experience. I have never been an internal auditor but I have bumped into them many times. The problem with Anglo Irish Bank is similar to the problem with Robert Maxwell all over again, namely, one dominant individual who was allowed to rule the roost. The problem was at the top and if there is a problem at the top of any organisation there is a risk that it will flow down through the organisation. I do not for a moment suggest any impropriety or deliberate intent in respect of that but they are given their budgets. I have no inside knowledge of Anglo Irish Bank, my knowledge is based on what I see in the newspapers. I would imagine that it was a case of a very clever chief executive with a very powerful influence. Management gurus call it the spider model, where everything revolves around one guy in the middle who calls the shots for everybody else.
It would seem that the board of Anglo Irish Bank did not exercise sufficient oversight. The fact that the chief executive was promoted up to the chairman's office was a red flag that everybody should have spotted. That was in contravention of the combined code of corporate governance. No one does that. When Mr. Michael O'Leary leaves Ryanair he will not go to the chairman's job. It would be seen as too bad by the international investor base. Post-Maxwell, the combined code of corporate governance has evolved for the past 20 years and it has standards about internal audit and director's remuneration. One of the key principles is that the chief executive does not move upstairs, he moves out at the end of his tenure.
I looked at the De Larosière report last week and it just seemed to be a model aimed at international banking. I am not sure that Irish banking will be as international in the future as it has been in the past. As a taxpayer I am delighted that the guarantee is in place. The guarantee will always be in place. It always was in place in the sense that there was always an implicit guarantee. When I was involved in international lending, banking limits were put in place for other banks. One would always look at the government and the regulator and whether the government would be behind the bank in question. That was always the first factor and then one looked at the credit ratings, the numbers, the analysis and the ratios. That is how one did it. If a dealer inquired about lending money to LTCB in Bahrain, one asked who the government was and who the regulator was and whether they would be there when needed.
That approach is implicit in banking and it has now become explicit since last September. Even if the legislation is not extended, once the legislation runs out of time in September 2010 the guarantee would be there. Does that mean as a taxpayer I am happy to guarantee the debts of big banks that are going to be used to fund operations in Poland, the UK and North America? Probably not. As a taxpayer I am happy for my banks to have a guarantee that is explicit or implicit so that they will lend money to people in Ireland to create wealth here. I am not sure we will have many big international banks coming out of Ireland in future. If Irish banks want to have international operations, my guess is that the best outcome for the taxpayer will be that they will fund those operations out of debt coming out of the international markets and there will be an explicit statement from the Government that if something goes wrong and they lose money in their overseas operations the taxpayer will not bail them out, which means that the risk will be priced correctly. One prices the risk knowing that the government will be there. If lending is stand-alone without government support then the cost of lending is priced much higher because the risk has to be reflected in the price. Therefore, if banks are to invest in an overseas operation they must ensure they will get enough return to pay back the properly priced risk for the debt they are getting to invest in those operations.
The De Larosière model will be aimed at the likes of HSBC, Dresdner Bank and BNP. I really have to see how our banks will look before I can give an informed view as to how that will work here. I hope that answers members' questions.
I join with the Chairman in welcoming Mr. Moynihan to our meeting. It is especially appropriate as he is a constituent. I am very pleased to have him here.
Mr. Robert T. Moynihan
I thank Deputy Kirk.
It is timely for him to speak to the committee. Does Mr. Moynihan believe the changes that should take place in the financial services sector in general and the banking sector in particular in Ireland, the United States, Great Britain — all the Anglo-Saxon economies as he described them — should be made on an individual basis by each state or should be made collectively by the financial industry within the functioning area as we understand it?
Regarding bad and toxic loans, some economists in the media are advocating that we should establish a bad bank and that bad and toxic loans should be deposited there to deal with the problem while other economists feel individual banks should establish an asset management structure to handle the individual problems.
What does Mr. Moynihan consider those who control the financial sector within the EU should do to neutralise the negative impact of hedge fund activity?
Mr. Robert T. Moynihan
If I understood Deputy Kirk's first question correctly, as to whether our response should be international or domestic, I think there will be a two-tiered response. The Royal Bank of Scotland is already selling off its businesses in China. It is shrinking its balance sheet. Last year it was part of a €75 billion consortium to buy ABN AMRO. It is now heading towards becoming a UK domestic bank that will have the vast majority, if not the entirety, of its operations in the UK. That will be demanded by the UK taxpayer. It does not make any sense for the UK taxpayer to fund the Royal Bank of Scotland's investments in China. There will be an international response by the large banks and probably less than 15 or a dozen of them will be left standing. There might be two American banks. Also included may be JPMorgan Chase. In Europe there might be BNP, Deutsche Bank, HSBC and possibly Barclays. The international response will be quite different. There will be two tiers of banks in the future and the politicians will force this because they and the public will say what has happened must not recur given the impact not only on the economy but on society as a whole.
In respect of the toxic banks, I believe we will end up nationalising all the banks. This will not only be the case in Ireland because the same will occur in respect of Citibank and Bank of America. Even though this would be very un-American, it looks like it will have to be done. If one were to create a toxic bank, how would one price the assets?
The banks are getting a lot of abuse at present from people saying they must come clean and state the value of their bad debts. The value of bad debts will differ depending on whether the economy shrinks by 2%, 5% or 10%. The banks' computers, which have fantastic data intelligence, could calculate pretty quickly what the bad debts would be at a give rate, for example, 10%. If the economy declines by 30%, my mortgage will be toxic. If it declines by 20%, I will be able to pay my mortgage. I am self-employed in a sector that is thankfully relatively immune to the recession. We do not know what the toxic assets will be worth. On the residential consumer side we have no way of knowing but we will be able to quantify it in ten years. We do not know how bad the economy will be.
All the unfinished houses and properties, the finished but empty houses and the land banks will have to be ring-fenced. The only way for the Government to get them off AIB, Bank of Ireland, Anglo Irish Bank and Irish Life & Permanent would be to own all those banks, in which case it could shuffle the decks and place all the assets under one bank. I do not understand how this can happen if the banks still have some degree of private ownership.
Hedge funds comprise another tricky issue. They are an essential part of the markets. The word "gambling" was used to refer to them and this is common. The function of financial services in general and the function of the markets in particular, be they bond, equity, credit or currency markets, is to provide prices. They comprise a price-discovery process and price the risk. I stated that if one of the big banks were to invest overseas in a few years, it should borrow funds from the international markets on an unguaranteed basis, explicitly with no recourse to the Irish Government. The funding would be priced according to the risk the investor felt was appropriate to the investment being made.
Financial services generally are not about gambling but about channelling money from savers to investment. The price and volume at which the transfer takes place is driven by the financial markets. Financial markets, if they are to operate properly, need what are called long buyers, which typically involve pension funds paid for in cash in the hope the price will increase, but no market can be a one-way market. One needs people who will be able to provide the accounted party to the deal, which means short selling. I agree that what I have seen in recent months has been rapacious. First targeted was Northern Rock, followed by some of the monoline insurers, other institutions and those engaged in short selling. That has been overdone. We must find a way to curb the excesses in this area but banning hedge funds and short selling is not the way because markets will not function properly if there are only buyers and no sellers. For a market to function properly, there must be people who can short sell. This is because not every asset will increase in value. People will look at assets, say they are overpriced and request to sell them by way of short selling. That is a valid and essential function if markets are to operate properly.
I thank Mr. Moynihan for attending. His presentation was really interesting.
There is a misunderstanding about short selling. It makes for a more efficient market and I do not know how it can be replaced. Short selling and hedge funds, which Deputy Kirk mentioned, are regarded as bad phenomena because, to a large extent, people do not understand them or know why they exist. Short selling makes for an efficient market. All the short sellers of the banking stocks were right; that is the point of the matter. The ones who sold Anglo Irish Bank's stock and all the others got it right. The ban on short selling forbade them from doing so but it did not make any difference in the end. The prices still collapsed and Anglo Irish Bank was worth nothing. Hedge funds required a certain amount of explaining.
I was interested in Mr. Moynihan's statement on our having a good regulator. I do not know enough about other regulators internationally or about their performance. Three major banks of the six banks covered by the guarantee scheme in Ireland have been caught cooking the books. That is basically what happened, as was evident from the year-end figures of 31 September last year. None of them was caught by the regulator and this would indicate that what is going on is fairly endemic. There is no indication that Bank of Ireland, AIB and EBS have been involved in the same practice but one must say that because it has not emerged does not mean they have not. Is this not an extraordinary indictment of the regulator? I presume no other country in the world has such a record. Some 50% of our biggest financial institutions were doing very strange things. It was not just Anglo Irish Bank. Anglo Irish Bank had the co-operation of two other financial institutions to help it get out of certain circumstances. They got up to business that no regulator could possibly tolerate. No regulator here seems to have spotted the activity. There is even an implication that there may have been a "wearing the green jersey" attitude that gave people an excuse to behave in a way the regulator could not approve of. Has there been comparable bad behaviour internationally?
Our regulator did not have the power to fine until 2004. We have the worst performing banks in the world in terms of regulatory behaviour, yet none has been fined bar one, namely, Irish Nationwide Building Society. However, the latter case occurred some time after October after the regulator had been taunted about various matters. In spite of its record, the regulator has fined individuals and smaller bodies for what appear to be minor offences, yet banks, when caught, have not been fined at all. Remedies have been proposed and repayments made but no actual fines have been paid.
Our regulator was certainly working on a very loose regime but it did not even meet the targets it set itself for monitoring the banks — in other words, sending in inspectors. It was way behind in this regard also. It did not even meet the very limited and minimal targets. From a position of statistical ignorance, I ask Mr. Moynihan whether this indicates we are way behind international standards pertaining to financial regulation.
Mr. Robert T. Moynihan
There is room for improvement in two or three areas. Some of the points the Senator makes there emerge in one or two of those. First, the he is absolutely right — until 2004 whatever one of the big banks did, the regulator could threaten to take away its licence. If the regulator rings AIB and says, in effect, that if it does not sort itself out it will take away its licence, that is not an effective deterrent, because it cannot do so. AIB will invite the regulator to just try and shut it down, knowing that it cannot. Nonetheless the regulator has these powers.
I believe these powers are too few, by the way. The maximum fine that can be levied on a firm is €5 million and €500,000 on a senior manager. In the UK the Financial Services Authority, FSA, has the power to levy an unlimited fine, effectively a criminal power of sanction. We tried to impose principles-based regulation and one of the handouts sets out the UK principles.
The first principle there is rammed home in every publication, every speech and in everything that the Financial Services Authority does, namely, integrity. The FSA has the power to fine or sin bin somebody, give him or her a yellow or red card and get people out of financial services. In some cases where people have failed to act with integrity they were told, in effect, "You can never get a job as a tea lady in financial services again".
I believe we have focused too much on the laws and the regulations. Newspaper reports indicate that when various incidents have arisen, the response from the regulator has been to call the lawyers to see whether they are legal. That misses the point. We need to have a principle of regulation, or integrity, that is subject to enforcement. It is not about deciding whether something is legal but rather about hitting the offender in his or her pocket. If I am driving along on the phone to somebody and a garda sees me, there is a rule which says that it is an offence to use a mobile phone. There is no rule which says I am not allowed to cut my toenails while driving on a motorway at 119 km/h. However, if I come before a judge and a garda says we have video footage of this guy cutting his toenails at 119 km/h, the judge will say I have breached the principle of driving without due care and attention. Even the courts apply high level principles. If there is not a specific rule, a matter comes down to principles and if one breaches such principles one should be subject to sanction.
We do not have a clear set of principles in our financial regulatory service. We have tried to promote principles-based regulation here in Ireland, but I do not believe we did it very well. Virtually all signalling from the Financial Regulator was to the effect that enforcement would be based on rules rather than principles. Inspections also focused on rules. There are various sets of principles. There is one in the consumer protection code, one in the client moneys plan and one in the strategic plan used by the regulator. Principles should be like the Ten Commandments. There should be one set, they should be as short and clear as possible and hellfire and brimstone should fall on somebody who breaches them. They are moral values rather than legal rules. That is one big difference that I find between the UK and Ireland. They have been pumping out those principles in the UK.
As regards the enforcement action, if a garda is going to fine me for using a mobile phone while driving, that is a strict liability offence and it is straightforward. In the other example, he or she will make a case in front of the judge that whatever my offence, for example cutting my toenails, it amounted to driving without due care and attention. It is a harder call to make than in the mobile phone case, which was relatively easy. However, the garda has to be prepared to take a risk and say, in effect, "This is wrong, there is a lack of integrity here and we are going after you for it". As with some of the cases referred to by Senator Ross earlier, it is evident that there was a lack of integrity not just by Anglo Irish Bank, other people were involved, too. I trust that is an answer to the Senator's question. Relative to the UK, I believe there is a lack of integrity here as an enforceable principle subject to a high level fine or even a red card for life.
I will put it like this, as regards the people in other organisations. Another UK principle relates to where someone might be working in one of the other organisations Senator Ross mentioned. That principle states: "A firm must deal with its regulators in an open and co-operative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice." If I am a senior official in a bank, and am contacted by somebody in another bank who wishes to put through a transaction and it looks to me that this person is going to get involved in something that is false, misleading or in breach of integrity, if I go along with it, then I will be in breach of a principle and put my own organisation and livelihood at risk.
The questions that have been put to some of the other financial institutions to which the Senator alludes might not have got the welcoming embrace they seem to have been given if that principle had been in place. From a recorded line it could emerge later that a call was made to one, even though one might not have done the transaction. In the United States one can plead the "fifth amendment", but this is 180 degrees away from that. One has an obligation in such a situation to contact the regulator and say, in effect, either "We've screwed up" or indicate that somebody else is trying to do something that is pretty dodgy.
When it comes to international comparisons as regards bad behaviour, one might put it down to 800 years of repression or whatever, but in some ways enforcement has not been among our stronger points here in Ireland in recent years. If one looks at the recent figures as regards road fatalities, it is quite evident that enforcement works — and there has not been sufficient enforcement emanating from the regulator.
Could the Senator please repeat his query as regards the targets of supervision?
I was really saying that the regulator had set himself targets for monitoring and inspections.
Mr. Robert T. Moynihan
The resources the regulator had were never properly funded.
Why was he setting targets if he did not have the resources?
Mr. Robert T. Moynihan
Media or political pressure, I do not know. The regulator was enormously under-resourced, for such a critical agency. Evidence of that under-funding and the problems it gave rise to is there for all to see. I served on the financial services consultative industry panel and my eyes used to glaze over at the amount of time we spent looking at the Financial Regulator's budget. This was the wrong answer. We should have been looking at the quality of regulations, not just the cost to the regulator, the cost on industry and society of regulation. I have done some estimates — and as far as I know no one else has — of the incremental cost of financial regulation in Ireland using ratios designed by academics in the United States and elsewhere and I reckon the figure is around €1 billion every year. That is not the cost of running the agencies or even the cost of running the banks. It is the incremental cost on consumers.
We had a budget of €35 million to €40 million or whatever. They were, effectively, in a goldfish bowl and if the costs were up they would get pressure from the media, industry, the Irish Banking Federation, etc., because half of those costs are passed back to the industry. At the same time, within the last few years they were dealing with the financial services action plan, coming from Brussels. They had to deal with a juggernaut load of directives and everything else. They could not possibly have done all the things we would have liked them to do. They wanted to do a great deal more, but the resources just were not there.
I do not know how many inspections they were doing in the banks. Media reports indicated that the number was very small as regards inspections inside the banks. I know they would have liked to have done more.
I thank Mr. Moynihan for his informative presentation. My understanding is that in the UK the organisation and the specific employee can effectively be barred. If there is a fine in Ireland, it would just relate to the organisation itself.
Mr. Robert T. Moynihan
No. It affects only the organisation and the senior people in the UK, who are known as approved persons.
Whereas here it only relates to the organisation.
Mr. Robert T. Moynihan
No, the senior managers can be fined up to €500,000.
However, they cannot be given a red card.
Mr. Robert T. Moynihan
They can.
Can they be stopped from working in the industry for evermore?
Mr. Robert T. Moynihan
They can be stopped from working at a senior level in the industry for evermore, but only for a breach of a specific——
It is broad in the UK, and is on the integrity basis.
Mr. Robert T. Moynihan
Yes.
We have heard a story about Anglo Irish Bank where the Financial Regulator relied on legal opinion provided by the bank itself. We also know that the CEO of that bank became its chairman. Mr. Moynihan said that should not have happened post-Maxwell. Is Mr. Moynihan saying that part of the reason that regulation was not imposed was due to a lack of resources within the Financial Regulator, or practices within the regulation system, or both?
Mr. Moynihan referred earlier to nationalisation of the banks and spoke about toxic banks. Fine Gael put forward a slightly different variation and I would like to hear his opinion on it. We would leave AIB and Bank of Ireland as toxic banks, set up a new AIB and a new Bank of Ireland and transfer the good assets to those new banks. The toxic banks would effectively become debt management agencies. They would no longer be required to meet capital ratios and would only need to be kept solvent so they could continue to function in line with company law and so on. Could Mr. Moynihan see that model working?
Why does Mr. Moynihan believe nationalisation of the main banks is so important? How would the banks eventually become market institutions as opposed to State institutions? We would like the banks to stand alone. Does he believe that what is now being put into the two main banks is sufficient? Is it bad value for taxpayers' money? What else could have been put in place to ensure that funds flow to small businesses and mortgage holders?
Mr. Robert T. Moynihan
I will deal with the Deputy's last point first. If I was head of one of the banks and it was still privately owned, my initial response would be to lend as little as possible, as I do not know how bad the economy will get. If I want to minimise my losses and accelerate my recovery, that is the only response. As long as banks are privately run and privately managed, that is a rational response.
What about the shareholders?
Mr. Robert T. Moynihan
It is not the best long-term response for the country. It is priced into the markets and that is why we will go that way. I cannot see banks lending with any degree of enthusiasm. They do it to make money, to make profits for their shareholders and minimise their losses. Therefore, the only rational response is not to lend. As consumers, we are all responding by not spending. It is not good for society, but individually it is good for each one of us. The banks are as rational as consumers, and that is what they would do as well, which is why they will have to be nationalised.
Why do banks need to be stand-alone entities?
In time.
Mr. Robert T. Moynihan
It is something that has not been explored. There is a strong academic argument claiming that banks are like the ESB. They are a form of utility and are so important for society.
Is competition in the market not healthy? We are hearing about bank nationalisation. Why are people putting this opinion out there? Mr. Moynihan put forward a case because he feels that whatever is done at the moment, the banks will not lend in requisite amounts to enable the economy to be kick started. Could any recapitalisation mechanism be put in place to ensure that funds flow to small businesses and to mortgage seekers? That is the key.
Mr. Robert T. Moynihan
The UK Government has been trying to put in place an insurance mechanism in recent weeks, but it is not working yet. It will take time to get an insurance mechanism out into an organisation of 10,000 to 15,000 employees like AIB.
What does Mr. Moynihan think of our view on leaving the existing banks as toxic banks, and setting up new banks?
Mr. Robert T. Moynihan
What is the difference between moving the toxic assets to one bank and moving all the staff and new business——
There would not be the major requirement to value the toxic debt.
Mr. Robert T. Moynihan
One would have to value all the good stuff that is being put into the new banks.
Yes, but it is far easier to value that than the toxic debt. That is the cost to the State. We are currently pumping money into the two main banks that have a combination of toxic and good debt.
They have not got to the bottom yet.
The legislation has now gone through. The Government now has the power to put the money in from the National Pensions Reserve Fund.
Not yet.
I apologise, it is going through the Seanad at the moment. The point I am making is that the toxic debt is effectively dragging down the economy. Mr. Moynihan spoke about a 30% reduction. That is occurring because the toxic debt is affecting many good loans as well. There will be loans with no flow of funds from the banks that have been reduced in value. We propose to leave the toxic debts in the existing banks and transfer the network and the assets to good banks. This can be done to enable those banks to borrow on the international markets. Mr. Moynihan made the point that the international markets are now distinguishing between the domestic business of the banks and the international business of the banks. He feels that banks will have to use the wholesale markets to fund investments abroad. He also feels that international investors will now factor the Government guarantee into that.
Mr. Robert T. Moynihan
If those banks start having big international operations in five years' time, the taxpayer will wonder if he or she must foot the bill again if they start losing money in eastern Europe. The taxpayers may be happy to allow the banks take risks in Ireland, but they will not want to bail out the banks if they lose money in Poland.
I am not sure how the existing book can be moved.
It is more about showing the international markets that they will be providing money to a bank with good assets, as distinct from lending to a bank with an unknown amount of toxic debt. The proposal effectively creates a fresh bank to enable the markets to function. A new bank can claim that it can generate sufficient profits and the investment of international markets would be secure.
Mr. Robert T. Moynihan
What would be the difference between that approach and moving the toxic assets out of the existing bank?
If we move toxic debts out of the existing bank to a toxic bank, then those debts will have to be valued. Our model proposes to leave the toxic debts within the existing banks. It would effectively be a debt collection agency. It is another model. It is just a variation, but one which is taking the good rather than the bad.
I welcome Mr. Moynihan. I apologise I was not here for his presentation but it was important for some of us to attend the Order of Business in the Seanad this morning. I understand from colleagues, in particular Senator Ross and Deputy Kirk, that Mr. Moynihan gave an excellent presentation, on which I compliment him. I look forward to reading the full transcript.
We have had so much concealment and deceit in some of our institutions that it is clear they were making their own rules and had no regard for regulation. Effectively, in many instances, they were doing as they wished. We have a good office in the Office of the Director of Corporate Enforcement, OCDE, but, as I understand it, it is has no power in law to go in to, say, a building society. Mr. Moynihan might comment briefly on that.
I agree with the point about the banks. The banks will not want to lend because they want to keep their ratios up and they do not want nationalisation owing to the shareholder response. On that point, why is Mr. Moynihan so strongly in favour of nationalisation and what does he see in this for shareholders? Naturally, given the need for the stability of the banks and our economy, there must be a concern for small savers and the mix of investors, including widows, widowers and elderly people who have seen their nest eggs decline. Would nationalisation wipe them out altogether? I would like to hear Mr. Moynihan's view.
Deputy Kieran O'Donnell has covered the "bad bank" concept. I foresee problems in this regard because one cannot value the loan book properly because one cannot say when a debt might come right and be left in the legacy bank. It would be very hard to make a proper judgement in that regard.
The guarantee scheme was an essential first bulwark but it will expire in 2010. There will be an attempt to renew on the interbank market bonds for billions of euro so if we do not extend that scheme beyond 2010, they will be choked again.
Mr. Robert T. Moynihan
The Senator's first point concerned the powers of the ODCE. I am not a lawyer. I claim only to know a lot about a small area of law, which is financial regulation. The ODCE is concerned with broader corporate law enforcement, about which I know a little, but I do not know much detail about its powers. The ODCE is the enforcement agency in respect of many of the Companies Acts and related legislation.
Even now, we are all a bit confused when something goes wrong as to whether it is fraud and who should deal with it — whether it should be the ODCE, the Garda fraud squad or the Financial Regulator. Other countries do not have this problem because it is always quite clear who should do it. In the UK and the US, there is clarity as to which agency it will be. If the issue has anything to do with financial services in the UK, the financial authority has the power to take criminal prosecutions, and it has done so. All financial services law in the UK is the responsibility of one agency. We have become untidy. I am not sure which agency is responsible. While the UK has one piece of legislation which covers everything, we have a myriad of Acts dating back to the Central Bank Act 1942. I understand an exercise is ongoing to rationalise all the Acts to bring them into one piece of legislation, which I welcome.
With regard to nationalisation, if I understood the Senator correctly, he asked about the position of shareholders such as widows and orphans.
There is a mix of people.
Mr. Robert T. Moynihan
In a capitalist society, they pay their money and they take their chances. They have no greater claim on taxpayer bail-out than I have in respect of the loss of my house in the past two years.
Does one not have to weigh up that huge consideration if one is taking the nationalisation route?
Mr. Robert T. Moynihan
Their money is lost anyway.
With respect, it is not.
Mr. Robert T. Moynihan
Those banks would be insolvent if the guarantee had not been in place. In an insolvency, the shareholders lose everything.
Coupled with the recapitalisation which is in process, and will hopefully happen quickly once the legislation passes today and the President signs it tomorrow, that does not have to happen because the ratios will be bolstered by the recapitalisation. I take Mr. Moynihan's point that they will want to maintain the ratios rather than undertake the lending we would wish them to do for a myriad of reasons. They will protect themselves to buy time for this recovery but they will not be insolvent.
Mr. Robert T. Moynihan
As a taxpayer, I feel they are there only because of my generosity. The Senator should not get me wrong. I have great sympathy for people who have lost money in shares and I have equal sympathy for people who worked with Dell and lost their jobs, and all others who are losing their jobs. There are many losers in all of this——
I am thinking more of the stability of the system.
Mr. Robert T. Moynihan
The Senator is right.
It was a Government decision which the rest of us are broadly backing because our concern is for our economy, and our economy cannot function without stable banks.
Mr. Robert T. Moynihan
Absolutely, which is——
These are the two biggest banks, with huge bank branch networks throughout the country. Is it not in our interest in the first instance, if we can do it, to save them and to keep them as they are rather than nationalising them? Of course, I agree with the preference shareholding that has been taken and the interest rate return for the State and the taxpayer. Of course, the taxpayers should be rewarded for what we are doing. While I am not trying to take from that, it is more important in the first instance that we do not nationalise them.
Is there any mechanism by which funds could flow to small business? That is obviously a part of this.
Mr. Robert T. Moynihan
I agree it is critical. I cannot see a mechanism while they remain in private ownership. Citibank is now 40% owned by the US federal Government. The head of Citibank last week said he is there to run Citibank in the interests of shareholders. If I was a US taxpayer, I would say: "Hang on a minute, we just gave you $40 billion and you are running this company for somebody else." It does not make sense.
Presumably, the Government on foot of this recapitalisation and putting in money to bolster the ratios, will, as I understand it — it would be foolish not to — insist on X millions or billions being set aside to free up working capital credit lines for small businesses and to lend so much more for first-time mortgages. Will this be part of the detail we have not seen yet but presumably——
Mr. Robert T. Moynihan
I cannot understand how the Senator would get around the conflicts that will arise in that situation. While the shareholders will not be screaming for less lending, they will have a different set of priorities. This is why I said earlier, perhaps before the Senator arrived, that banks are an essential utility to our system and society——
Of course.
Mr. Robert T. Moynihan
——which means there is a strong argument for them to be entirely nationalised, perhaps forever. There are two issues. First, I think they will be nationalised and, second, I think they should be. Whether they will be is a view but they should be because they are so essential to getting society off its knees again. We will have to pump money to key sectors and viable sectors. We must be careful not to pump money to sectors that will not be viable because we will be pumping good money after bad. It works in the VHI——
Yes, but it is not the model we seem to have chosen. Presumably, on foot of the recapitalisation — as I said, we have not seen it yet — the Government will have a very detailed agreement incorporated in this regard. Perhaps we are dealing with that aspect some days too early.
Perhaps that is the case.
I very much respect Mr. Moynihan's point of view and his theory on recapitalisation. I just want to tease it out.
Mr. Robert T. Moynihan
Before the Senator arrived, I said that when a bank is looking to borrow money or have a bond issue, one looks at the rating but more particularly one looks behind that and asks what government is involved, how stable are the government and the regulator, and whether they will be there if it all goes wrong.
Banks are subject to an event risk. We saw Barings Bank get blown away over a weekend and we saw Société Générale lose €7 billion. Things can happen. Banks are prone to instability. They have always gone bust and they will continue to do so, it is to be hoped never on such a systemically wide scale again. Investors know that so they will now be asking themselves with regard to a bank that is looking for long-term debt funding whether they will lend it money with the risk that they will not get some of it back. If it matures beyond the end of September of next year, they will be facing the risk so I believe they will say "No". There may be a difficulty in securing funding, even if the explicit guarantee is renewed. I suspect the second tier financial institutions, including AIB and Bank of Ireland, would struggle to achieve a bond issue at any price.
Should the guarantee be extended?
Mr. Robert T. Moynihan
It will have to be extended. I do not see how it could be otherwise. As a deposit holder, I am eager to see the guarantee extended. By September next year everybody will be wondering whether they should do something before the end of the month. There will be a general concern that if they are not first in the queue on the morning of 30 September, they will be toast. International investors will have exactly the same concern. Does that answer the Senator's question?
It does.
The Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Bill 2009, currently making its way through the Houses, gives the Government, through the reserve fund, the power to take a stake in the specified institutions through preference shares. Does Mr. Moynihan expect there will be a return for the State on this investment in the coming years? The results posted by AIB this week include a reference to potential loan write-downs of more than €8 billion. It seems likely, therefore, notwithstanding the Government's undertaking to recapitalise each bank to the tune of €3.5 billion, that the banks in question may be caught short.
The view of the global financial markets is that Irish banking stocks are untouchable. In this context, the measures the Government is taking are not necessarily being recognised as positives. It seems more must be done if confidence in our banks is to be restored. Aside from the regulatory issues, therefore, there is the question of why the markets do not necessarily view the recapitalisation measures as a positive development. If they did, there would have been some increase in the share price in recent days.
I am interested in Mr. Moynihan's views on nationalisation. What would be the logical conclusion of such a process? If, for example, AIB were to be nationalised, what signal would that send to the markets in terms of how Ireland is conducting its business? Given that nationalisation requires the suspension of shares, what impact would that have on a bank's ability to fund debt into the future? If the taxpayer is to own 100% of the banks, can those banks continue to operate within the market in the same manner as they have done heretofore?
Mr. Robert T. Moynihan
The answer to the last question is yes. One need only look to the German state banks in this regard. The reality is that the position of the Irish banks is crowded out by the international view of the Irish economy. Whether we get €500 million back from each of the banks in compensation for the guarantee is irrelevant. What is important is that we get people back to work. There is a much broader political issue. It has almost come to the stage where the banks are merely background noise. The real issue is getting the economy working again, of which the banks must be part. We have to work them to do this. I cannot see that it would work best for society for the banks to be still dancing to a private tune.
I apologise for being late. I was delayed because of the Order of Business, but I managed to hear most of Mr. Moynihan's excellent presentation on the monitor.
I have one question on regulation but since there has some discussion of a possible nationalisation of the banks, I will deal with that issue first. I compliment Mr. Moynihan on being one of the few who seem to know what should happen and what will happen. In general, this debate is clouded by too many grey areas. To what extent has nationalised banking worked in other open economies? Until recently, most of us would have regarded the nationalisation of banks as a notion of the loony left or something only likely to happen in Cuba in the early 1960s. Now, however, it is being countenanced by reasonable people such as Mr. Moynihan. If the banks will ultimately have to be nationalised, is it not better to set about that task in a proactive way rather than continue with the current process, whereby changes are made inch by inch and row by row? We seem to be moving in that direction by default.
The major scandals that have emerged in recent months have clearly shown the consequences of weak and ineffective State regulation. I expect this will be a growth area for Mr. Moynihan's business. I may be wrong but I suspect most people in corporate Ireland have been looking at their consciences in the last six months and considering how they are fixed in the context of a whole new regime of regulation and examination. Is Mr. Moynihan of the view that the scandals amount merely to the lifting of the rock and that there is an entire subspecies of dubious activity at various levels in corporate Ireland? For example, without meaning to point the finger at a particular area, does Mr. Moynihan expect there to be revelations about the absence of regulation in local authorities, vocational education committees, various units of Departments and semi-State bodies? I am not calling for a witch hunt but I wonder whether there are more revelations to come. Have we merely seen the tip of the iceberg?
Mr. Robert T. Moynihan
On the Senator's last question, I can only remind him that I specialise in financial service regulation. I must duck any inquiry about what is happening elsewhere because I do not know enough about it to offer an informed comment.
In regard to whether there is more widespread wrongdoing across the banking sector, I am of the view that the integrity failings at some of the top banks are isolated incidents. I deal with many banks and life companies and I am strongly of the view that they are generally managed according to the highest standards of commitment, honesty and integrity. What is certainly a difficulty is that the culture of the organisations has changed. My father worked in banking all his life. In those days the bank manager met the customer and it was all about customer service. Now it is about the pressure of meeting sales targets and so on. I am guilty of this in so far as I am the manager of my private pension. For that purpose, I pick the investment manager and pension fund that will get the best returns. That investment manager will put pressure on the chief executive officers of the various banks to achieve higher returns. That pressure flows down to the local branch network, with the result that a customer who comes in for a loan is flogged insurance and all types of other products. That culture must be swept out. Financial services must be about genuine service. In the same way that a doctor will ascertain what afflicts his or her patient and prescribe the appropriate cure, the bank manager must find out what the customer needs and offer him or her the appropriate financial solution.
That would represent a sea change in the practice to which we have become accustomed which is anything but customer-driven.
Mr. Robert T. Moynihan
The banks must revert to being customer-driven. One would be wary of consulting a doctor who was motivated primarily by the need to meet sales targets for particular medicines. I am not a regulated investment adviser but people often approach me for such advice having found that the official investment adviser they consulted was only interested in selling them something else. That is now how it should be.
For the last 25 or 30 years, since the era of Thatcher and Reagan, Western societies have been obsessed with capitalism, market solutions and so on. We have hit the rocks and will move back after that. I do not know how our societies will look when we get out of this and regulation must be a function of how our societies will look subsequently. I am a free market capitalist. However, there are particular areas in which the State must intervene, if the risks involved in such sectors are such that if something goes wrong, the private sector may not always get the answer that is optimal for the State and the State consequently must step in and pick up the bill. I am unsure whether pure unbridled capitalism is right for such sectors.
What would be the biggest disadvantage, were the banks nationalised? In respect of its economy overall, what has been the Swedish experience? It is the only model of which I am aware.
Mr. Robert T. Moynihan
My recollection is that overall, the aggregate collapse in GNP in Sweden was approximately 15% and they came through a couple of years later. It will be the same here, regardless of whether there will be a decline of 20%. I refer to an aggregate decline if one adds together three years' figures. The Swedish state still has an 18% stake in Nordea Bank 17 years later. The position there differs from that which obtained in Wall Street or in London until recent events. Sweden always has had a sizeable ownership in this regard and its society is very different. The differences are much broader than those pertaining to banking and regulation, as Sweden's whole society is run differently. They always have had higher taxes and social welfare, as well as higher support by the state in all aspects of people's lives. Therefore, if one picked as a solution something that worked in Sweden's banking sector and imposed it here, one might not get the right answer.
As for nationalisation, I do not think there is any further down-side. We have taken all the down-side we are going to get and I cannot see it being any worse.
On behalf of the joint committee, I thank Mr. Moynihan for his attendance and for his excellent presentation, which has given members plenty of food for thought. The joint committee will adjourn until 10.30 a.m. next Tuesday, when the Governor of the Central Bank will appear before it.
The joint committee adjourned at 12.45 p.m. until 10.30 a.m. on Tuesday, 10 March 2009.