Mr. Matthew Elderfield:

I thank the Chairman and the committee for inviting me back to discuss the progress made in improving financial regulation and supervision since I was last here in May 2010, at which time we discussed the Comptroller and Auditor General's work on the lessons of the financial crisis. There is a lot of ground to cover, but I will be brief as we can cover more of the detail in the discussion.

Let me spend just a few minutes on three areas: supervisory capability and approach, regulatory standards and powers and regulatory philosophy, including the role of enforcement. Let me mention one loose end from the Comptroller and Auditor General's Special Report 72 which relates to auditor assurance statements. They are the two measures the Comptroller and Auditor General mentioned that have been implemented.

I sound a note of caution that while good progress has been made in improving financial regulation and supervision in Ireland, we are by no means all the way there yet. As a supervisor, one is almost always playing catch-up with the industry and it is dangerous to think one will get to a point when one can rest on one's laurels. Therefore, it is important to maintain the momentum of improvements, keep the regulatory framework up-to-date and ensure supervisory capabilities are always at their best. It is also especially important to be vigilant against backsliding and attempts to compromise the independence or dilute the diligence of regulation, especially when times start to get good.

In terms of supervisory capability and approach, it was clear that supervision was under-resourced in a range of areas; therefore, staffing levels have necessarily increased in the past few years. My original estimation was that the regulatory function division of the Central Bank would need to be some 725 persons strong, but based on experience, process improvements and efficiencies, I think a target level of around 600 would be sensible for the end of the current three year Central Bank strategy in 2015. Continually striving to improve quality is also important, by ensuring the right mix of experience and investing in training in order that supervisors have the skills to challenge firms effectively. Ensuring the Central Bank can attract and retain the skills it needs will, no doubt, become an increasingly demanding challenge as the market for the relevant specialised skills improves. Having some 600 supervisors into more than 10,000 regulated entities requires some strategic choices to be made about resource allocation which we undertake through the new risk assessment framework we have developed called PRISM, probability risk and impact system, not the NSA's PRISM that is in the news. This involves an implicit exercise in setting risk appetite in terms of ensuring adequate resource levels for those firms that have the biggest potential impact on customers and their financial stability should they fail. Our PRISM system also provides a framework for systematically scoring firms on the risk they pose against particular categories such as credit risk, market risk and operational risk. We then communicate these risk scores to the firms, together with a risk mitigation plan which in plain English is a "to do list" for firms to address. This system is new to the Central Bank in the past couple of years and reflects best international practice in how to assess risks in an organised, consistent and systematic manner. The framework does not provide a guarantee that failures will never occur - we should expect that they will continue to do so in smaller firms - but it does mean that we will closely man mark the largest firms in order to reduce the risk of their failure.

Supervision is about how one polices the rules; regulation is about setting the rules. There is a very busy international agenda of regulatory change which is feeding into Ireland via the European Union, the G20 and the financial stability board. I have some sympathy for industry about the volume of change taking place and the challenges this poses for implementation. At a domestic level, the Central Bank has been focused in the initiatives it has taken on the statutory code for corporate governance, the new framework for fitness and probity and the major changes that impact on most sectors. These have helped to fill important gaps in regulation. I am also very grateful to successive Governments and the Members of this House for the support they have provided in upgrading the supervisory and enforcement powers available to the Central Bank, with legislation in this area close to final adoption. This is a welcome step towards improving the regulatory framework. It will be important to keep fine-tuning the rules based on emerging international best practice.

In this very brief survey I wish to say a word about regulatory philosophy. The lessons of the financial crisis are clear - supervision and regulation were too light touch. As the IMF states, good supervision is, in fact, intrusive. As Professor Patrick Honohan said in his review, supervisors need to be decisive in following through on issues. Our PRISM system is designed to provide a framework that prompts such action; for example, we closely track the risk mitigation programme plans we send to firms to ensure they are doing what we ask them to do. However, at the heart of the approach there needs to be a robust regulatory philosophy that encourages challenge. We have described this as "assertive risk based supervision underpinned by a credible enforcement deterrent".