Profile: Patrick Honohan
Sarah Gilmartin profiles Central Bank Governor Patrick Honohan of whom much is expected, not least restoring Ireland's credibility in the financial markets
There will be more, I'm quite sure." Central Bank Governor Patrick Honohan's unequivocal pronouncement on the need for further State investment in the banks came the same day the Government was forced to take a 16% stake in Bank of Ireland last month. A choice of words that conjures up the poor Dickensian orphan Oliver Twist, it was an apt, if unintentional, metaphor for the Irish banking sector which with empty bowl in hand continues to ask for more. Please, sir.
Professor Honohan reaffirmed this view at an
Oireachtas committee meeting on finance and the public service earlier this
month, where he said Irish banks will
need additional capital following the transfer of loans to Nama. How much this
will amount to remains to be seen, but at a time when everybody is asking for
more, the man who took on one of the pivotal roles in Irish finance last
September has his work cut out for him.
Born in Dublin in 1949, Honohan comes from a family well known for its service to the State. His father William served as secretary to the Department of Social Welfare for 20 years and was one of the founders of the ESRI. His brother Edmund, now Master of the High Court, previously worked as an adviser to former taoiseach Jack Lynch. Coming from a background where economics, politics and the public sector featured prominently, Honohan chose to study economics and maths at UCD where he graduated with first-class honours in 1973.
Before getting his PhD from the London School of Economics in 1978, he worked first for the International Monetary Fund (IMF) and then with the Central Bank of Ireland until the mid 1980s. During this time he also acted as economic adviser to former taoiseach Garrett FitzGerald while he was in government. Noted for having a good amount of international experience in his career to date, he moved to Washington in the late 80s to work for the World Bank (WB), before coming back to Ireland in 1990 to head up the ESRI's banking research centre.
But the wanderlust hit again a few years later and in 1997 he returned to the WB. This time round the position involved acting as an economic adviser to numerous foreign governments.
His research work at the WB ranged from studies in systemic financial crises to financial sector finance for developing nations such as Africa. Returning once again to Ireland, after a period as a research associate, he was appointed professor of international financial economics and development at Trinity College in 2007, where he remained until his appointment to the Central Bank last September. His new job is somewhat more demanding than his previous position. With what were formerly two separate bodies now combined in the Central Bank and Financial Services Authority of Ireland, he is in charge of over 1,000 people.
A universally popular figure in academic circles, peers say Honohan has an excellent intellect with a deep understanding of the Irish economy. His appointment was broadly welcomed as a good move, given his expertise both on a domestic and international level and the fact that he has not been shy in the past in criticising perceived failings in both his new home and the office of the Financial Regulator. In the 18 months preceding his appointment, he had written extensively on the crisis. He criticised, among other things, the extent of the guarantee granted by the Government to the banks in September 2008 and the decision to support some of the subordinated debt holders. Announcing his appointment, Minister for Finance Brian Lenihan said he believed Honohan would be of "enormous value" as Ireland works through the difficulties in the economy and banking system.
Welcoming him to the Oireachtas committee last month, Fine Gael deputy leader Richard Bruton said: "He brings with him not only the good wishes of every citizen, but he also comes with a well-deserved reputation for being very objective, with a high level of expertise in this field. He has written what is probably the most lucid account of what went wrong in our bog-standard property bubble before he became Governor of the Central Bank."
The day it was announced that Honohan was to become governor, a thread went up on Irish current affairs site www.politics.ie on his likely impact on Ireland's domestic banking disaster recovery programme. What would this mean for Nama? Did the appointment signal the much sought after sea change in the manner in which the Department of Finance did business? Would he take a hard line stance from the outset and sack those who had been asleep at the wheel?
On this last point, there has been little movement so far. The appointment of an academic to the role of governor was a first for Ireland. But some say the appointment has come too early, given the current state of Irish banking. Honohan has been hugely critical in the past about the performance in the regulating bodies, but does he have the experience to give the Central Bank a root and branch makeover?
"The appointment should have happened a year or two from now," says a senior industry source. "He is an academic and what the Central Bank needs right now is a manager - a ruthless, reforming manager who can come in and shake up the hornet's nest. Bring in someone with capabilities on the management side of things, not someone from the academic or research end of things. Patrick Honohan has not been in a position where he had to hire and fire people in a process that would have led to a transformation of the entire institution. He is an absolutely superb economist and an excellent appointment for the Central Bank - but after the administrative and managerial reforms take place.
"Such reforms would enable Honohan to deploy real change from an intellectual and technical perspective. But right now they need someone like Willie Walsh who can walk in and fire those who need to go and then promote and hire the people the Central Bank needs in its functional departments. It is not a question of his capability as an intellectual or academic - he's got that without a doubt and is a huge improvement of what has been there before - it's a question of whether he has the full management support for deep change needed at this particular moment," says the source.
Honohan made headlines last month when he said that those who committed criminal acts in the face of the banking crisis should go to jail. This is very much in line with public opinion on the matter, but he modified his view somewhat by pointing to the difficulties in achieving such convictions in "highly complex matters". Some have criticised these comments as mere window dressing. With a public who believes, as Richard Bruton pointed out at the committee meeting, that the only accountability seen so far from the Central Bank and the office of the regulator are golden handshakes, this is something Honohan may have to go after if his sentiments of reform are to be believed.
Other changes have been easier to effect. Though they may not be the head-rolling, headline grabbing movements that the public is calling for, some changes have already occurred at the Central Bank, including a new no-nonsense chief of financial supervision in Matthew Elderfield, former financial regulator of Bermuda, a whole-bank risk approach and a big rise in the number of staff dedicated to bank regulation.
Investigations are also currently under way on his watch into what has been going on, or what hasn't been going on, in the Financial Regulator's office and the Central Bank in recent years, which may result in significant structural changes further down the line. The inquiry focus is on the respective functions of both bodies and how they assess and respond to risk in the banking sector. A strange task in some ways, to investigate an organisation you now run, the eight-man team he has to help him includes Donal Donovan, a former senior advisor at the IMF, and ex-Competition Authority member, Professor Paul Gorecki from the ESRI.
Confident in his ability to juggle the poacher-gamekeeper duality of the job, he confirmed to the committee that he will interview both his predecessor at the Central Bank, John Hurley, and former regulator Pat Neary during the course of the inquiry. A full report into Anglo Irish Bank and Irish Nationwide will also be submitted to the Department of Finance by May. This will roughly coincide with another inquiry on the performance of the banks and banking system, led by German economics expert Klaus Regling. Both reports will then feed into a statutory commission of inquiry in the second half of the year.
Before becoming governor, Honohan had in the past suggested that Nama should deal with the banks' bad assets on a phased basis. His most recent comments on the bad bank agency occurred at the committee meeting where he outlined his strong support for Nama, highlighting that he believed the plan would create the necessary foundations for recovery. Significantly though, he stopped short of saying that it would directly help the flow of credit in the economy.
While it may "set the scene" for economic regeneration, he pointed out that the issue of credit hinges on borrowers and lenders regaining confidence.
Restoring credibility in the Central Bank is one of Honohan's main challenges in the year ahead. Dealing with the fallout from Nama and its impact on the wider economy is also top of the agenda, as is setting the right balance in terms of regulation. It remains to be seen how the gifted academic will deal with the problems that surround him, but as he made clear at the committee meeting, he is well aware of the realities of the job: "I will not take the easy option where, instead of looking at the organisation I have been asked to look at, I will range far and wide over Government policy and decisions. That would be of no help to anyone."
