Expert says financial regulators fell down on the job of enforcing rules

In an Independent article, Professor Gerard Caprio observed that much of the financial crisis could have been avoided if the global financial regulators had not failed to do their job and enforced the rules.

More importantly, he goes on to say that the issue of who guards the guardians to make sure that the global financial regulators are doing their job needs to be addressed.

Regular readers know that one of the reasons your humble blogger has been advocating for requiring banks to provide ultra transparency is with the disclosure of this data market participants have the information they need to make sure the financial regulators are doing their job.

More importantly, if the regulators don't do their job, the financial system is not put at risk as banks are still subject to market discipline as market participants use the data to adjust both the amount and pricing of their  exposures to the banks based on an independent assessment of each bank's risk.

THE Irish financial regulator missed one of the basic warning signs when it ignored the fact that Anglo Irish Bank was breaking its own lending rules, a leading US expert on banking said yesterday. 

Professor Gerard Caprio said this was part of a widespread failure of regulators in many countries to enforce existing rules which could have prevented much of the financial crisis. 

"The breach of a bank's own lending limits is a warning that management is no longer putting the safety of the bank as its number one goal, and the regulator needs to take action quickly." 

The Irish regulator, then headed by Patrick Neary, wrote to Anglo about the rapid growth in its loan book, which exceeded the bank's own guidelines, but took no action. 

"Lesson one in how to regulate banks is: 'Stop rapid lending'," Prof Caprio said. 

"The Occupy Wall Street people shouldn't be in Wall Street -- they should be outside the Federal Reserve. I understand people's anger, but I never think that bankers are working for me. I hope the regulators are working to protect me, and they fell down on the job." 

Prof Caprio, who worked with Central Bank Governor Patrick Honohan in research on banking, argues in a new book that regulators need to have an outside body keeping check on how they are doing their job. 

"We call it the sentinel. It would need to be a high-powered, independent body, with forensic financial accountants, lawyers and economists on it, which wouldn't come cheap," he said. 

"Regulators who fail to enforce the rules should face losing their jobs, or even financial penalties like loss of pension."

Requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details allows the market to oversee both the regulators and the banks.

Prof Caprio, who is professor of economics at Williams College in Massachusetts, said he thought Ireland had done more to get to the causes of the banking crisis than the US. 

"Ireland now has very good people working in regulation but it needs to get away from depending on having the right people, and more on creating structures that will work," he said.

The necessary structure being the requirement that banks provide ultra transparency.