Ms Mary Burke:

Thank you, Chairman. And good afternoon to members of the joint committee. I have, as requested, submitted a written statement to the inquiry under two broad categories of themes on which I have been directed to give evidence: regulatory, supervisory and Government; and banking.

For the purposes of this statement and in the interest of time, therefore, I propose to focus on particular aspects of my commentary on the regulatory and supervisory themes. It may also assist the committee if I clarify again that my personal knowledge of, and involvement with, those themes dates from my appointment to the head of banking supervision department in May 2006. It may further save time if I reiterate that while I may take issue with some of the fine detail of the respective Honohan and Nyberg reports, I accept generally the thrust of the findings contained in them. As with the commentary I have already provided to the inquiry in writing, the commentary I will now give is necessarily generalised, given the constraints already mentioned by you, Chairman, and, in particular, the strict non-disclosure requirements to which I am subject by virtue of section 33AK of the Central Bank Acts.

My opening commentary briefly centres on five issues which are as follows: IFSRA's regulatory approach and philosophy; the regulatory and supervisory toolkit; effectiveness of regulation and supervision; any relationship between macroeconomic policy and prudential policy; and prudential policy itself.

In terms of regulatory approach and philosophy, the regulatory regime implemented by IFSRA was positioned as principles-based. The approach to regulation appeared to me to be broadly similar to that previously applied by the Central Bank and did not represent a significant shift in prudential regulation or supervision. From my perspective, the focus on defining it as principles-based seemed driven by a desire to brand the organisation and its strategy rather than any fundamental change in approach per se, beyond the changes associated with consumer protection. As articulated at the time, principles-based regulation placed an emphasis on seeking to require regulated entities themselves to abide by good governance and on the responsibilities of the boards in management of such institutions to have, and maintain in place, appropriate governance as well as controls and risk management measures in order to appropriately manage their institutions.

However, principles-based regulation was not without rules. The cornerstones of banking regulation in May 2006, the point at which I was transferred to BSD, were the capital adequacy directive, the Central Bank Acts and the building societies Acts. A key document supporting the regulatory regime was the licensing and supervision standards. However, it should be noted that these standards were non-statutory and not enforceable as such. EU legislative initiatives also changed the regulatory landscape. The capital requirements directive became fully effective in on 1 January 2008. This was a complex framework which, amongst other things, facilitated the use of banks' internal models for the calculation of regulatory capital and mandated supervisory co-operation through colleges of supervisors, particularly in the context of capital decisions for EU banks and banking groups.

Since the emergence of the crisis in 2007, and given the scale of changes to the regulatory framework at international, EU and domestic level, it is only reasonable to accept, albeit with the benefit of hindsight, that the pre-existing regulatory regime, both domestically and internationally, was not fully appropriate in terms of the areas covered, the detail prescribed and the regulatory tools available. However, in my view, revision of the regulatory framework in and of itself is not, and would not, have been a panacea. In fact, given the nature of the issues we now know to have arisen in Irish banks, I would suggest that the regulatory powers available to IFSRA and the bank before it, were broadly sufficient, aside from those with respect to crisis management and resolution.

In my view, the issues were the strategic approach, and the willingness or otherwise, as well as the logistical wherewithal, or lack thereof, to use those powers to prescribe detailed rules or to challenge and intervene in a manner which would impact banks' business models. The strategy was, I believe, influenced by external factors, including international approaches to regulation and supervision, Government policy and its better regulation agenda, the promotion of Ireland as a financial services centre, industry influence and costs. The effectiveness of the regulatory regime is directly linked to the culture of the supervisory authority and the resources allocated to supervision. Unlike the regulatory framework, which is set out in legislation and published requirements, these are tangible aspects which are not necessarily visible and can be lost in statistics and in the prose of formal strategy documents and annual reports.

However, importantly in my view, a more onerous or prescriptive regulatory framework would, in and of itself, not necessarily have delivered a significantly different outcome if, as was the case, the supervisory resources, both in terms of staff numbers and specialist expertise, were not in place to monitor, challenge and enforce where compliance was not delivered. If there are insufficient people to do the work, the work simply cannot be done. In that regard, in 2006, BSD had an approved staff complement of only 53.5, with actual numbers averaging around 50, to supervise approximately 80 banks, 50 Irish-licensed and 30 EU branches. The level of resources, and the available specialist expertise, was not such as to be capable of delivering intrusive supervision, even in a business-as-usual mode of operation. Added to that, during my tenure in BSD, a business-as-usual scenario never in fact applied. Initially, there was the additional burden of implementing the CRD, and from August 2007, the crisis mounted with ever-increasing issues and problems heaped upon an already under-resourced and over-stretched department.

While an additional complement of three staff was agreed in 2007, my request for additional staff in May 2008, in the face of the financial crisis and the demands being placed upon the department, was effectively refused. A subsequent oral request that staff who had previously worked in BSD be re-assigned to the department was also rejected. It is difficult to convey the sheer scale of pressures management and staff in BSD were working under, particularly from autumn 2007 onwards. It was not a question of somehow multi-tasking: it was a question of dealing with an unrelenting onslaught of demands, with staff working unreasonably and unsustainably long days, and ultimately weeks, with no let-up. Resource constraints were such that IFSRA was unable, although required by the CRD, to conclude on ICAAP assessments for banks by the end of 2007. Throughout 2008, staff were, on an almost daily basis, being assigned additional responsibilities. Every new issue or new request was a priority on top of existing priorities, and issues with one institution were dealt with at the expense of issues with others. It was only immediately following the introduction of the Government guarantee that an increase of 20 in staff complement was agreed, and a separate department dealing with the Government-guaranteed banks was established. Over the following years, BSD was restructured on a number of occasions, with overall staff numbers for banking supervision increasing to approximately 140 approved in 2010. From 2010 onwards, supervision was also supported by the newly-established policy enforcement directorates.

In terms of the use of powers, even where regulations were sanctionable under the administrative sanctions process, in the period 2003 to the end of 2008, no prudential enforcement cases were pursued against credit institutions. I consider there were a number of factors in this: strategically, the authorities saw the sanctioning process as being primarily a tool in consumer protection; there were concerns regarding market reaction as the crisis mounted; and BSD did not have the resources to mount and pursue such cases. It was only as the resources issue started to be addressed, from 2009 onwards, that prudential enforcement cases became more routine.

In assessing the effectiveness of the supervisory regime, it is also important to understand the culture of the organisation and the different levels of industry engagement. IFSRA's relationship with banks appeared to me to operate at two levels: at a frontline level with BSD and at a senior executive level. Senior banking executives had direct contact with senior executives in IFSRA, often without the knowledge of, not to say engagement with, supervisory staff. Staff were regularly requested by senior IFSRA executives to review decisions or issues based on these discussions, or were told by contacts in banks that the issues had been or would be discussed with our senior executives. To me, at its most benign, this indicated a disconnect between BSD and senior IFSRA executives. I believe it also signalled a manifest lack of support for staff, undermining them in their dealings with banks.

In terms of any linkage between macro-economic and prudential policy, when working in BSD, I saw no evidence of a strong link in that regard. Given the demands placed on resources, as a result of the implementation of CRD, at some time prior to my arrival in BSD, a decision was taken that the department would cease to be actively involved in work relating to the financial stability review. However, this would have been in the knowledge that the relevant economic department within the Bank had access to data regarding individual banks. The financial stability committee was a formal structure for co-operation between IFSRA and the bank on financial stability-related issues. However, the main focus of meetings tended to be on drafting of economic articles and publications.

In terms of prudential policy, IFSRA took a number of policy measures aimed at strengthening the regulatory framework, including the introduction of liquidity requirements. In implementing options and discretions, under the CRD, it took a conservative approach to the exercise of discretions in relation to property-related lending. The proposals on all options and discretions were subject to a public consultation in October 2006. In addition, the Governor of the Central Bank confirmed that the proposals represented the best that could be achieved in the circumstances. While these interventions can now be seen to have been insufficient, it is worth noting that IFSRA was the only public authority which took measures to try and cool the property-related lending.

Further detail on these and other lines of inquiry is provided in my written statement. In addition, I have not dealt with the specifics of the regulatory framework and supervisory arrangements as I am aware the Central Bank has provided significant detail on these to the inquiry. Again, thank you for the opportunity to make this opening statement. I hope it is useful in providing additional background and context on the wider issues under consideration by the inquiry.