A lot of people are surprised when I tell them how many firms have to be supervised by the Central Bank of Ireland - according to PRISM Explained, this is over 10,000 firms... as have become evident after Ireland's recent financial crisis, a change was needed in how these firms are regulated.
But how can this be done:
- Do you assign 10,000 supervisors to the Central Bank and have them each regulate a firm
- But what about large firms like Allied Irish Banks - should they have one supervisor assigned when there is so much going on?
- If you assign one regulator per firm, then are you giving the same attention to all of Allied Irish Banks as you are giving Skibbereen Credit Union (no offense to them, I am a west Cork man, so they got picked...)
- If you have a more realistic number of supervisors like 500, how do you make sure you have enough people working on Allied Irish Banks and still give Skibbereen Credit Union the attention it requires.
It gets even more interesting if you look at the breakdown of regulated firms in Ireland... as per PRISM Explained, the number of firms in each Impact Category is approximately:
Now, that looks interesting, but wait until you see it in visual form:
You can't even see the Medium High and High firms there - even if you remove all the Low impact category firms, you still see the challenge here:
A set of quotes in PRISM Explained should be remembered here:
"Under PRISM, the most significant firms - those with the ability to have the greatest impact on financial stability and the consumer - will receive a high level of supervision under structured engagement plans, leading to early interventions to mitigate potential risks. Conversely, those firms which have the lowest potential adverse impact will be supervised reactively or through thematic assessment"
So whether we like or not or if we think a firm in a specific sector should get more attention, a decision has to be made on how best to apply limited resources.
"PRISM is designed to deliver value for the taxpayer. It explicitly recognises that we can only have a finite number of supervisors and that we must deploy them where they can make the greatest difference – on the firms which have the most impact."
We could ask the Central Bank to hire several hundred or even thousand more supervisors, but wouldn't we like to see an attempt being made to apply resources in an effective and efficient manner?
By way of analogy, An Garda Siochana does not take detectives off its Special Detective Unit to patrol shops after every case of shoplifting that is reported. Neither will we take resources from our most important firms to closely supervise economically insignificant firms. Clearly, if there is spate of “shoplifting” in an area, we will undertake appropriate investigation (as any police force would) and may reform our working practices/enforcement appetite to deal with the issue robustly to deter other firms from tolerating similar failings.)
As it says above, you need to apply your resources in an effective way - but you must be willing to look at changing this as required... I suspect that a member of the Central Bank, whose father was a policeman may have added the above analogy, but that is only speculation...
"In launching PRISM, we do not pretend that we can or should prevent all firms failing. Firms will and must be allowed to fail in a functioning market economy – the direct costs of staffing the Central Bank to guarantee absolutely no failures ever would be prohibitive."
We will see firms fail... we will have to hope that they are not as big as the country's major banks and that those larger institutions are being properly supervised by the right number of people...
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