Lessons for the Irish Government on Basel II and accounting failures

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.