Consumers are to be limited in their borrowings under new proposals being considered by the Central Bank. The measures are part of sweeping reforms announced today to ensure there won't be a repeat of the financial crisis.
The Central Bank says consumers' ability to borrow has been largely unfettered and there has been no regulation of credit limits. Now it plans to introduce restrictions based on people's disposable income.
In addition the banks will be restricted in their lending to more risky sectors of the economy.
The Central Bank wants banks to draw up plans for how they could be closed in a future financial crisis.
It has also hit out at the financial industry for moaning about the Central Bank's plans to publish its submissions regarding the new regime.
The Central Bank said that if the comments cannot be published they are either spurious or do not stand up to scrutiny.
The Central Bank's report
The Central Bank's plans for sweeping reform were published this afternoon in a report called 'Banking Supervision: Our New Approach'. The report outlines how the Central Bank will introduce a more 'intrusive' approach to overseeing institutions as well as introducing credit limits for consumers.
The report says that while banks may not be popular after the actions over the last decade when they borrowed imprudently and lent recklessly, they remain essential to the functioning of the economy.
Read the Central Bank report in full here
The Central Bank says its new 'intrusive' model of supervision means that it will have regular, detailed contact with banks, including attendance at board meetings and key risk management committees.
During the second half of the year, the Bank will also commission reviews of governance and risk management arrangements at the major retail banks. These will look at such issues as the skill and experience of bank board membrs and the range of measures banks have taken to address weaknesses in practices and processes, which were exposed during the recent banking crisis.
Today's report says that the Central Bank is reforming its approach to supervision of the country's banks, mortgage credit standards and funding risks.
Banks have been asked to provide data on new mortgage and sales targets, arrears levels for the past year, mortgage drawdowns and risks to future lending. Today's report says that when the Central Bank identifies risks in an institution, it will now insist on action to mitigage that risk.
Where banks cannot, or do not, take appropriation action, the Central Bank warns that it will use its supervisory powers to force a solution.
The banks will also be expected to broaden their lending capabilities, and the Central Bank says there is an an 'economic imperative' to lend to growth businesses and sectors.
The Central Bank also wants to see the introduction of a Credit Register, which it says is a key resource for any banking system and operates in most other European countries.
The register would be able to check a bank's exposure to loans, was well as multitple borrowings by a consumer. The Central Bank says it 'could be made responsbile for making the connections which would act as a check on the credit institution's complaince with large exposures limits and reporting'.
The register would be an important tool for both regulatory authorites and the banking industry and would also bring major benefits to consumers, the Central Bank says. It would also allow for greater competition both from existing banks here and new entrants to the market.
The Bank says that legislation may be required to provide a suitable framework and data protection issues would need to be fully addressed.
On corporate governance, today's report says that the Central Bank will introduce, under its statutory powers, standards designed to strengthen the Irish regulatory regime.
Among other requirements, the new rules will impose a minimum number of directors, a review of board membership every three years and a clear separation of the role of chief executive and chairman. The bank will also examine pay levels for executives in the country's financial institutions.
More Central Bank staff to be recruited
Today's report states that in the past resources for supervision were far below what was required. To this end, the Central Bank is to recruit 150 extra staff this year, bringing overall staff there to 1,300. It also plans to increase regulatory staff by as much as another 200 over the next two years.
It wants to have a minimum of 10 supervisory staff per firm for major banks and building societies and improve specialist expertise by recruiting staff with director business/banking experience. A compulsory training programme for all new and many existing Central Bank staff will also be held.
The Bank is also to set up a risk experts panel, who will prepare reports on key risks as they evolve and provide advice on proposed rules and regulation.
Today's report says that lending by commercial banks here needs to return to sound fundamentals and lending standards, or what it calls a traditional form of banking.
It said that as lending to property developers at the height of the Celtic Tiger grew, banks increasingly focused on complex deals, profit sharing and personal guarantees to justify lending decisions.
'Credit institutions must return to more prudent lending standards, in an economy that will not be driven by property,' today's report states. It says that credit granting will be based on sound and well-defined criteria, while banks have to ensure that valuations are prudent and up-to-date.
