The right people are needed to supervise the banks here

Eugene McErlean lived near Navan and worked for five years as the head of internal audit at AIB, the bank"s most senior internal policeman. As part of his work, he uncovered and reported to his superiors and external financial regulators on major overcharging cases at its retail branches and documented questionable procedures at AIB-owned Goodbody Stockbrokers up to 2001. He was doing the job the bank paid him to do, maybe rather too well. Then, in 2002, he left. AIB announced his departure by press release on the day it published its report into the activities of its employee, John Rusnak, in the US, the rogue trader who had cost the bank $691 million. At the time it was one of the largest ever banking scandals in the world and the impression was sown that chief internal auditor McErlean was in some way responsible for the huge supervisory failings. Insiders knew at the time that McErlean had no responsibility for the bank"s US operations because, years earlier, AIB had curtailed the powers of one of McErleans"s predecessors to poke around in oversesas subsidiaries. However, the slur on McErlean was left hanging. Despite his senior qualifications and experience, he failed to find work in financial services. He sought vindication by seeking records of conversations he held with the financial regulator about his work at AIB. He was blocked at every significant turn. He and his family moved from their home in Meath to Co Down. Then, last week, in the extraordinary surroundings of an Oireachtas committee room, with McErlean listening in from the public gallery, departing AIB chief executive Eugene Sheehy offered the bank"s fulsome apology for the way the bank had treated its former chief internal auditor. TD Fergus O"Dowd and Senator Shane Ross of the Economic Regulatory Affairs Committee said that, instead of discouraging McErlean, the bank should have given him a medal. Over the last seven years, Eugene McErlean failed to secure employment in either Dublin or Belfast. He had effectively been blacklisted, TDs said last week. Seeking justice, his family wrote last year to members of the Oireachtas committee. TDs and Senators, including the committee chairman Michael Moynihan, listened and were aghast at the story McErlean told. Many got a glimpse into the workings of the financial services industry here over recent decades for the first time. McErlean"s story illustrated the wider failings of regulation here and the Dail Committee arranged this spring a series of public hearings to air McErlean"s main allegations that the financial regulator delayed publicising evidence of the overcharging abuses that he brought to its office. The regulator denied the claim. But the gracious apology he got from AIB last week will not end the affair. The story goes well beyond an injustice suffered and a reputation restored. When he left the bank, he says he applied for a job at the financial regulator. The most senior internal auditor at the largest bank failed to secure even an interview. McErlean"s testimony to the Oireachtas hearing lifted more of the dirty curtain. The failure to regulate the banks meant that, a few short years later, the economy faced meltdown. The story of a gifted auditor failing to secure a job at a flawed financial regulator"s office is even more highly ironic. The regulatory structure failed in every possible way. TDs realised that McErlean"s testimony went well beyond a tale for a search for justice. Expect to hear a lot more self-serving nonsense talked about the regulation of banks here in the coming months. The focus has rightly shifted to the National Asset Management Agency and the best and least expensive way for the taxpayer of clearing out the billions of euro in loans at AIB, Bank of Ireland and Anglo Irish. Remarkably, little scrutiny has taken place of the way the financial regulator failed to do its job. At a crucial time, three or four years ago, regulators charged with safeguarding the banks appeared to be unable to do simple arithmetic to calculate that Irish banks were among the most exposed in the world by lending incredible amounts of money to a small band of building and property speculators. Instead, the regulators spouted jargon and talked of their so-called prudential and supervisory duties. They used stress tests that did not apply any pressure on the banks at all. Like some sort of Soviet-era publishing house, the financial regulator produced realms of monthly statistics. Every three months, it published a glossy-covered bulletin embellished with scholarly economic commentaries. The articles were as useful as nail clippings in their failure to question the lending practices taking place under their noses. The regulators failed to police. They had allowed the relationship between regulator and the regulated banks to be come warped. A robust regulatory system needs to be rebuilt. Commentators will still go on about loose structures that failed to govern the banks. Businesses know that bankers follow the herd. Banks are now unwilling to lend to viable businesses. Fresh thinking will be required from good regulators to face this crisis in the coming years. We need the right people to supervise the banks. Hopefully, that"s the main lesson that will be learned from Eugene McErlean"s testimony.