- that it is not their role to approve or reject individual trades at banks, rather
- their job is to ensure that banks have sufficient capital to absorb losses.
This policy leaves a large gap between what the market assumes is meant by supervision and what is actually happening.
The market assumes that the regulators are looking at the banks constantly and stepping in proactively when they see something that might cause a problem. This is simply not true.
[T]he regulatory authorities were aware that banks were engaging in "risky" behaviour ahead of the recession but did little to stop it.
... Both the Financial Regulator and the Central Bank either failed to detect or “seriously misjudged” the risks associated with the property boom. Both regulatory bodies were aware of the "macroeconomic risks" and of risky bank behaviour but appear to have judged them “insufficiently alarming” to take major restraining policy measures, his report concluded.
... The report notes that only a small number of individuals working in regulatory authorities saw the risks taken by banks as significant and actively argued for stronger measures to be introduced. However, it says that in all cases they failed to convince their colleagues or superiors of the need to take action.Not only did all the national financial regulators fail to properly assess the risk, but so too did the international financial regulators.
... External organisations such as the IMF, the EU and OECD are also noted for being at most, "modestly critical and often complimentary" regarding Irish developments and institutions.
Are financial regulators really going to talk about a problem given their focus on safety and soundness and their concern that any suggestion that all is not well at a bank will trigger a run?