Re-strengthening the banks: A lot done, more to do
Matthew Elderfield insists that changes have been made by the Central Bank, particularly in relation to supervision whereby they now adopt a “more assertive and risk-based approach” and demonstrate“we are more willing to tackle problems, as evident from some high profile cases”. Additionally, amongst the more visible advancements is the “continued commitment to consumer protection” such as a work on mortgage arrears and the consumer code yet less visible is “the fact that were making huge efforts to improve our engagement in Europe to try to influence the emerging policy agenda”. Significant internal changes, Mr Elderfield explains, have also been progressed within the Central Bank itself including the implementation of a new performance management system and use of a balanced scorecard “to set clearer objectives”. He also points out that efforts achieved thus far have been achieved through a team effort.
Upon taking the role, Mr Elderfield strongly advocated his goal to implement a more intensive approach to banking, something which,he adds, is “normal in almost all jurisdictions and applies not just to the banks but to all financial services firms”.Stricter banking regulation has also become one of the key lessons of the banking collapse. On a positive note, good progress has been made in terms of the banks, “particularly around forcing better recognition of losses, strengthening capital, disposal of non-core activities and restructuring the industry”. However, “the banking crisis in Ireland has been so severe and deep that it means this is a long project of slow and steady reform and improvement that will still take many years yet”.
How can you strike a balance between sufficient lending and equally sufficient regulation? “I think US Treasury Secretary Tim Geithner had an interesting perspective when he warned against collective amnesia from those complaining about overregulation, in light of the severe costs that the financial and banking crisis has imposed on society. The fact is that the Irish authorities have injected massive amounts of liquidity and capital into the Irish banking system designed to help support lending activity. But economic conditions are very weak and banks are still struggling to return to full health, so it’s no surprise that lending levels haven’t returned to normal”.
In a similar light, as queries now arise in relation the Central Bank’s code of conduct on mortgage arrears, which, some argue, may hinder efforts to retrieve debt, Mr Elderfield stresses that the Central Bank has made some adjustments at the margin to the code based on feedback they have received, but “it is clear from the work we have done looking closely at the banks that this has not been the main problem”. “The banks’ operational capacity to handle arrears cases was found to be severely wanting and required a major investment in terms of expertise, resources and systems. It was also necessary to encourage the banks to broaden their menu of techniques they apply to arrears cases and to be more rigorous in developing management information and setting targets for the handling of cases. It’s imperative that the banks stayed very focused on the mortgage arrears problem and work hard to re-underwrite their book and decide what appropriate actions are needed, offering loan modification as necessary where standard forbearance techniques will not work”. Working in this regard,he adds that “we have set the banks deadlines for piloting these new techniques and then rolling them out more generally, which will then hopefully be seen coming through in enhanced statistics on arrears which will be publishing later this year and early next”.
Ulster Bank technical errors
Questioned whether the recent IT errors at Ulster Bank will alter the banking landscape, Mr Elderfield explains he does not believe “the basic number of players in the Irish market is going to change because of this” yet “it is entirely possible that dissatisfied customers decide to move and the relative market share of the different banks changes”. Lessons can be learned from this episode however and the fact that “such problems could persist for so long, to such detriment of consumers, and expose the weakness of contingency plans, is clearly a source of great concern”. Mr Elderfield insists that a “number of reviews were conducted by regulators to learn the lessons from this episode”. The Central Bank alongside British colleagues at the FSA will conduct a review and additionally, there are two domestic initiatives, one by the Central Bank focused on Ulster Bank and another independent review looking at the payment system. He adds: “we are going to need to draw together the different threads and conclusions from this work to decide what actions are needed to strengthen the framework governing IT and operational risk. So, watch this space.”
Funding the banks
Earlier in the summer, Mr Elderfield stated in an interview that Irish banks will require a further €3bn or €4bn of fresh capital over the next six years. Asked to expand on this assertion, he explains that banks will require additional capital over the medium-term,in addition to residual uncertainty about the level of loan losses and the banks portfolios because “of the implementation of the Basel 3 international capital standards” which are“phased in over time and will require a more rigorous calculation methodology”. Additionally, “some of the standards we have already implemented, such as a higher threshold and greater reliance on equity. But the international rules will require a gradual phasing out of the deferred tax assets of the banks, as well as some other technical items, and this will have a significant impact on capital. This underlines the need for the banks to start to get profitable to meet these requirements and wean themselves off taxpayer support.”
Speaking on Ireland’s future economic prospects, he claims that there is clearly a “positive momentum” particularly in light of the recent announcement regarding Irish 9-year bond yields which have fallen below six percent for the first time since October 2010. The market is reacting “favourably to the measures taken to address the banking sector and tackle fiscal problems”. Yet, he warns: “There is still a lot of work to be done to consolidate and complete these reforms.” Referring back to his role as Head of Financial Regulation and future banking reforms, he affirms the need to continue the work already underway “in terms of ensuring losses are properly recognised and adequate capital is set against them, the restructuring of balance sheets and disposing of non-core assets”. Additionally, “there is also a big international regulatory agenda, including the implementation of Basel 3” mentioned above. Further aspects such as better ways of resolving troubled banks will also feature high on the agenda while “the banks themselves need to make progress in controlling costs and improving the profitability – and reforming their culture and approach to risk”. The Central Bank, Mr Elderfield confirms, “will pay a close interest in all these matters”.
European banking union?
Concluding, I ask Mr Elderfield his views on the prospect of a deeper European banking union developing, as advocated by many in Europe including the President of the EU Commission, Jose Manuel Barrosso. The implementation of a banking union, he says “could well be the decisive moment in the Eurozone crisis and a game changer”. “It opens the prospect of breaking the damaging link between the financial health of countries and the financial health of banking systems. If the agreement at the Euro group summit is successfully implemented it will have important benefits for Ireland. So, between now and Christmas there will be very intensive work at the EU level to try to make this a reality in terms of the specific elements around centralised supervision and sharing of risk.