Yesterday the financial regulator published a paper setting out its stall for what appears to be the most comprehensive of behavioural modification programmes ever attempted in corporate Ireland.
Banks will be required to demonstrate how they will change their ways to behave and conduct themselves as good banks. Bad banks will be punished.
Having ditched the timid carrot of its own far too deferential past behaviours, the banking regulator is busy carving a big stick.
In one accompanying speech, there are twelve references to the behaviour of banks which will be intrusively policed by the regulator using its new approach to risk- scoring through which it will categorise banks as good or bad. The message is clear. If you are good then we won’t throw the kitchen sink at you.
It’s all encouraging stuff full of the strong vibrant robust language of the post-Lehmans chastened but re-invigorated banking supervisor. Bankers, lawyers and other professionals who would prefer to mutter dissent off stage were advised to desist and to engage transparently and publically with the regulator.
It’s sound advice, until that is you begin to consider the potential for a new form of institutionalised censorship through which dissenting voices are silenced in deference to the will and power of an all powerful banking policeman.
People will no doubt pour over what the regulators’ comprehensive strategy and tease out the implications for themselves and their firms. But some might ask can it do what it says it will do?
There is a danger in overpromising and under-delivering which could undermine trust in the new style unitary central bank – the remarriage of central banker and prudential regulator.
There is no doubting the ambition of the new leadership. It says it will intrusively supervise and second guess our banks business models and strategies to reform themselves as traditional intermediaries between savers and borrowers. It will also have a large say in the future structure of the domestic banking sector.
The new regulator is on a path which will take on vested interests of the regulated, their professional advisers, permanent government and political policymakers. Tellingly it has warned that its “actions will only be effective if they complement rather than run counter to Government economic and fiscal policy”.
Its “attentive, assertive supervision” brings to an end the Great Moderation when deregulation extended to relying on banks to internally control their own excessive moral hazard behaviors. The dogma that the markets were the best policemen has been buried along with the sullied reputations of some but not all of those who led the charge for greater recklessness. In its first installment the regulator has set out its stall for reforming and rebuilding trust in the nations banking system.
Just as it is asking banks to radically transform the way they do business, the new Central Bank has a mammoth task to transform itself. It is not easy changing organisational culture - the way things are done around year. Rolling back years of embedded behaviours, introducing new processes, information technology, new governance and management systems and maintaining employee motivation and commitment is not easy. It is harder still when faced with a deeply engrained, deferential hierarchy that believed in its own abilities. Banking is not known for its ability to successfully engage in major transformational change.
Organisational change requires a fundamental transformation into a fit for purpose modern regulatory system capable of policing system wide and individual bank risks including not only domestic Irish commercial banking, insurance and credit unions but also IFSC international operations.
In a short period, the new Central Bank has restructured into two major component parts with ten divisions and thirty one sub-functions. Thirteen senior managers will have a total of 31 managers reporting to them. With a staff of 1300 and plans to add up to another 200, the complexity of the structure reflects the need to supervise 15,000 firms operating here and internationally.
However, the plan doesn’t deal with its own strategic and business risks. In particular it doesn’t address the scale of its own organisational transformation and how it will mitigate the risks involved.
So who ensures that management and the board of the banking commission deliver on their own strategy? Who polices the policeman? It’s not that clear.
A version of this article appeared in the Irish Examiner Tuesday 22nd June 2010, Business Section
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