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Practice paper

Lessons for the Irish Government on Basel II and accounting failures

Gerald Flynn and Cormac Butler
Journal of Risk Management in Financial Institutions, 6 (1), 23-36 (2013)
https://doi.org/10.69554/BSSF2739

Abstract

This paper identifies misconceptions among bankers, risk managers, accountants and government officials on the importance of operational risk (or more precisely regulatory risk) and its contribution to the 2007 banking crises. Attention is focused on Ireland where a number of initiatives such as a bank guarantee system and the setting of a National Asset Management Agency (NAMA) to buy troubled assets along with other schemes have failed to resolve the banking collapse that Ireland is still experiencing. The role of the EU along with the European Central Bank and their contribution to the financial breakdown are examined along with International Financial Reporting Standards (IFRS) and the Basel II and III rules. The paper concludes that initiatives such as the IFRS along with flaws in the Basel II rules contributed to the crisis, the former because it disguised insolvency, the latter because it interfered with the dynamics of supply and demand, creating an oversupply of cheap loans to certain sectors. Generous tax breaks and increased government spending also played their part. As a result of the misunderstanding and regulations, the 2008 guarantee offered by the Irish Government to Irish banks was flawed in practice in the case of Ireland and the decision to set up a ‘bad bank’ was deeply defective. Intervention from the EU continues, the lack of consistency is now becoming more clear but there remains the risk that if the Irish Government and EU fail to tackle the fault lines, Irish banks will continue to operate sub-optimally with severe consequences for the Irish economy.

Keywords: IFRS; Basel II/III; solvency; liquidity; National Asset Management Agency; European Central Bank; European Union

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Author's Biography

Gerald Flynn is a lecturer in Financial Management at the Dublin Institute of Technology. He is a qualified management accountant with an MSc in Strategic Management and a Bachelor of Commerce degree from the Dublin Institute of Technology and National University of Ireland Galway respectively. His current research interests are in the area of regulations pertaining to the financial sector.

Cormac Butler is a former consultant with Lombard Risk Systems London and has also worked with Peat Marwick and PricewaterhouseCoopers. He graduated from the University of Limerick, Ireland with a degree in Finance and has recently published Mastering Value at Risk (Financial Times Pitman). He has also published Accounting for Financial Instruments (Wiley).

Citation

Flynn, Gerald and Butler, Cormac (2013, January 1). Lessons for the Irish Government on Basel II and accounting failures. In the Journal of Risk Management in Financial Institutions, Volume 6, Issue 1. https://doi.org/10.69554/BSSF2739.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 6 / Issue 1
© Henry Stewart
Publications LLP

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