Ms Mary O'Dea:

Thank you, Chair. Thank you, members of the committee. The committee has asked me attend today to give evidence covering the period when I was acting chief executive of the Financial Regulator. I was appointed acting chief executive in January of 2009 for a period of about three months initially. This appointment was extended a number of times until the newly-appointed chief executive took up his position in January 2010. At the time of my appointment, I held a statutory office of consumer director, a role I continued to hold throughout my year as acting CEO.

As consumer director, I was responsible in law for consumer information and consumer protection codes.

My period as acting chief executive of the Financial Regulator started on 12 January 2009 and ended on 4 January 2010. It was a crisis period on a number of fronts, including bank funding and liquidity, bank governance, investigation of legacy issues and putting a system in place to manage the bank guarantee scheme. At the time, the organisation itself was also in crisis with uncertainty around the restructuring of the Central Bank and the regulator and its governance. The financial crisis continued throughout 2009, internationally as well as domestically. Anglo Irish Bank was nationalised in January and the Government announced capital injections for AIB and Bank of Ireland. In April, the Government decided to set up the asset management company, NAMA, which would take larger non-performing loans from the balance sheets of the banks. Confidence in the regulatory system was at an all-time low. The system of supervision and regulation that had been in place internationally and in Ireland had proved to be inadequate. At the same time, significant new responsibilities had been assigned to the regulator associated with the bank guarantee. In addition, our investigations were producing new information on serious governance matters at certain banks. As acting chief executive, I, along with my supervisory team, took the following actions with the full support of my board. From the end of January, we significantly increased the volume and frequency of periodic reporting by each bank in the areas of profitability, impairment provisioning, regulatory capital, liquidity, lending and governance. This information formed the basis of a comprehensive quarterly report to the Minister. We introduced a more intrusive level of supervision requiring active and frequent engagement with domestic banks. Officers of the regulator attended meetings of the boards and relevant committees, such as the credit committee, of these banks to assess at first hand if governance practices were working and to send a strong signal to the banks that the regulatory regime was different and that our expectations were different. We monitored the strength and weaknesses of banks' governance systems and challenged banks where we felt that their processes were weak. A report on governance issues was also included in the quarterly report to the Minister.

I set up an interim management structure to help address the fundamental issues we faced in banking supervision. In January '09, I also advised the board that these arrangements were appropriate on an interim basis but that they were not a lasting solution. A more permanent organisation structure, of course, could only be adopted when there was certainty as to the new regulatory structure, including its governance. It was clear that the level of intensification required for banking supervision could only be achieved with the addition of significant extra resources. We increased resources in the interim to manage the crisis more effectively, recruiting an additional 20 staff, including specialist staff where there was a deficiency, such as credit and liquidity analysts. By the end of 2009 there was over 75 staff in banking supervision, 35 of whom were dealing with domestic banks. We also set up a special investigations unit with around 25 to 30 seconded staff at various times and initiated a number of investigations into some specific events which had unfolded in 2008. Part of these investigations were reported to the Garda at an early stage, while others continued throughout 2009 with a view to exercising the regulator's own administrative sanctions powers in respect of any regulatory breaches involved. We took care to ensure that the use of the regulator's enforcement powers did not jeopardise any action on the part of the gardaí. As some of these matters are now subject to legal proceedings, I cannot, therefore, comment further.

To summarise for the committee, during my period as acting chief executive the new approach to regulating the guaranteed banks included a significant increase in information reporting requirements, more regular on-site presence at each bank, periodic attendance at board and committee meetings, greater review and scrutiny of management information, more frequent meetings with key officers, requirements for and reviews of business plans and challenging and monitoring of key variables affecting these plans, heightened focus on governance structures and processes and the introduction of a code of conduct on mortgage arrears and a statutory code of conduct for business lending. We engaged with and challenged the banks regarding various revisions of their business models throughout 2009, as we considered how best to maintain a viable banking system. In addition, the sensitivities of their profits, capital and funding to various assumptions were challenged to ensure that the plan was robust. In meetings with senior credit executives, we consistently challenged the banks to make more realistic assumptions of the position of their loan portfolios.

During 2009, our focus was on crisis management, as we assessed the scale of potential problems. Early in the year, our governance concerns were directed at the institutions in most difficulty.

We set out these concerns in our quarterly reports to the Minister. For example, in June 2009 there were three banks who were seeking a new CEO, two who were seeking new chair, two seeking heads of finance and two without risk officers. For new appointments we applied a fit and proper test. This involved gathering information about a proposed person's qualifications, experience and personal history. Aside from the boards of the banks, in 2009 it was clear that the expertise of staff in the lending areas was focused on sales and not on arrears management where there was a pressing need for expertise. Furthermore, preparations for the transfer of loans to NAMA tied up the credit resources as this process was lengthy and complex. During 2009 we used our supervisory powers extensively. Seconded inspectors were appointed to carry out special investigations into possible breaches of law or regulatory provisions. Over 70 separate engagements were held with banks at the level of acting CEO, ten administrative sanctions enforcement actions were concluded in that year, and fines which were ... ranged from €7,500 to €2.7 million were imposed with one disqualification direction.

During 2009 the integrity of financial reporting gained heightened significance and in that year we fined one bank €600,000 for breaches of regulatory reporting. I believe it's fair to say that the supervisory teams were in constant dialogue with the banks during this time, probing the extent of their liquidity and solvency problems and addressing the emerging issues appropriately. In March of '09 to ensure that our staff would feel comfortable heightening their concerns where there might be areas of disagreement, I circulated a written procedure to staff relating to the escalation of significant issues. In June of that year, the Government announced the new regulatory structure and asked the chairman of the regulator and the Governor of the Central Bank to work together as much as possible in advance of implementing this new legislation. In any event, this was necessary since almost all issues relating to banking at this stage had some sort of financial stability angle. During 2009 there was one IMF Article IV mission to Dublin, which reported in June, and referred briefly to regulatory and supervisory initiatives that were already in train. The main focus of the report was of managing the fiscal situation and the establishment of NAMA and a special resolution mechanism. It also noted that Ireland needed to be guided by evolving European Union guidelines.

During my year as acting CEO in '09, the quality and effectiveness of policies and regulations both from a European and an international perspective had already been declared insufficient and reforms were well under way. For example, in February of that year, the de Laroisiére Group published its report. The EU Commission had sought the report in '08 to advise on the future of European regulation and banking. It formed the basis for many of the subsequent changes to European regulation and supervision. Certain specific findings of the report are worth recalling, and I'll mention two quotes from the report, the first of which I misquoted slightly in my written statement. It says that both by banks and supervisors there was "a misunderstanding of the interaction between credit and liquidity", and this led to "an overestimation of the ability of financial firms as a whole to manage their risks and a corresponding underestimation of the capital they should hold". Having learned from the international crisis, the regulatory model in Europe is now much more intrusive and challenging with the associated significant additional staffing in place. The Single Supervisory Mechanism has now changed the nature of banking regulation much more fundamentally in Ireland and elsewhere. Ireland, as part of Europe, will benefit from the changes in the European structure such as the single resolution mechanism, which allows for banks participating in the banking union to be resolved appropriately if the needs arises in an efficient and centralised way. And, most importantly, there is now a clearly defined mechanism for dealing with these issues, which will be very much recognised by the financial markets.

The banking crisis resulted in an enormous cost for Ireland and for Irish people. The Financial Regulator and the Central Bank did not take sufficiently strong action at an early stage in the build-up of the property bubble, which might have mitigated the worst effects. In the environment of the time, I have no doubt that had the regulator taken stronger action to restrict lending, this would likely have been unpopular, could have been questioned and criticised, and pressure could have been brought to bear to reverse such action. So, one lesson from the crisis is that the regulator, now the Central Bank, needs to be supported in making difficult decisions because for a regulatory system to be effective it will include taking preventative action at a time when this action is likely to be unpopular.

Ireland has now moved from a principles-based approach to an intrusive and challenging approach to regulation, and this is appropriate given the lessons we've learned from the crisis.

But we must be realistic in our assessment of what changes the regulatory and supervisory system can achieve. For example, in the US, which has a much more rules based approach, there was also spectacular failures of banks and insurance companies. There, many changes have now been adopted through new legislation and the conversation is not so much about more intrusive regulation but about stronger enforcement action, stronger consumer protection and changes to the culture of banks. There is no perfect formula for a regulatory system that would prevent financial crises and, indeed, no regulator can operate a zero failure regime. However, in working towards a better system, transparency and recognition of risk is, in my view, one of the most fundamental pillars of appropriate supervision. The relationship between risk and return rarely changes, so that a careful examination of the relevant profit centres of any financial institution is a key part of identifying where the risk is. It could be derivatives trading, commercial lending, credit card insurance but if the relative profit seems high, the likelihood is that there's an unknown or unrecognised risk for which the bank is being rewarded. The bank's board, first and foremost, and then the regulator should follow the money, especially seemingly easy money, to probe these risks, both at an individual bank level and at a system level, paying particular attention to the most extreme scenarios. Today, we are unlikely to know the genesis of the next crisis, so we need to have a system which can react quickly to changing circumstances, including domestic, European and international circumstances. And finally, we also need to be confident to bring issues to the international arena where we see fractures in the system that are best addressed by regulators collectively.

Thank you, Chairman and committee. I'm happy to answer any questions now.