The professional public servant

Brian Keegan, Director of Advocacy and Voice at Chartered Accountants Ireland, talks to Gabriel Makhlouf, Governor of the Central Bank of Ireland, about the changing regulatory landscape, the challenges facing businesses after a tumultuous two years, and the need for greater financial literacy.

We think of the Central Bank as a regulatory body, but it is a very large entity. Can you talk to us about your management style and your personal approach to managing a large, highly-qualified staff?

The Central Bank plays a very important role across the financial system, particularly when dealing with people who work in risk and control functions. This is essential in ensuring that the financial system ultimately works in the best interests of consumers and the wider economy. We have strong, established relationships with auditors based on solid foundations with open communications and this is a crucial relationship for us.
I joined the Inland Revenue in New Zealand when I finished studying and I am a public servant, essentially, by profession. I trained as a tax inspector and I had a lot of dealings with accountants in the UK before I moved on to different things.

As a leader, there are a number of things that are really important to me. It is really important that the organisation is clear about its mission and vision, and that senior management makes that happen. People in leadership roles need to help the organisation to be clear on its mission and vision. This helps to promote focus and priority-setting.

I would like to think that the mission and vision of the Central Bank are clear. We are responsible for monetary and financial stability; making sure that the financial system works in the interests of consumers and the wider economy. We want to be trusted by the public. This is the dominant theme that I have been engaging with staff about since I took up my role. When the Central Bank was established in 1942, the legislation establishing the bank stated that the predominant aim of the Central Bank was the welfare of the people. This is an important statement which I still use. 

Are you satisfied that you are achieving this?

Yes, I am. I certainly think we can do better. For the people who come to work at the Central Bank every day, I think that sense of public service is really important. I think what we probably do not do well enough is to explain to people how our various policies ultimately promote the welfare of the people as a whole. As an example, our mortgage measures have a very specific purpose which has to do with financial stability, with indebtedness and with over leveraging, among other things. Underpinning all of that, from our perspective, is promoting the welfare of the whole country. That is very important to me.

As I have said previously, we need to be accountable to the public in an engaging and transparent way with key performance indicators. I put a big premium on diversity of thought and an organisation like the Central Bank must reflect this. I also think it is important for leaders to be ambitious for their organisations and I am ambitious for the Central Bank.

Leaders need to focus on the stewardship of their organisations. We need to spend as much time thinking about how to ensure the organisation will be fit for purpose for our successors, as well as for us. That puts a premium on leaders to look ahead, to understand their context and also to understand what their context will be in the medium-term, not just over the next year. We need to be able to accept that change is constant and happening in our external environment faster than it has ever before. Organisations like the Central Bank are all about people and the recruitment, development of staff is crucial for any organisation.

Following on from that point, can you talk about the challenges managing an organisation in a pandemic?

One of the legacies of the pandemic is how we are going to manage hybrid working. I think this is an underappreciated challenge and I think, personally, that remote working is unsustainable over the medium-term. 

At the Central Bank, most of us have worked from home for almost two years. A small number of us have been coming in every day because we had no option. For the first three months of the pandemic, this worked extremely smoothly. 

As time has gone on, people have changed jobs. People have left the Central Bank and new people have joined us. These new recruits have not physically been in the bank or met their colleagues. They have not had the experience of learning by observing. You learn a lot by observing what other people are doing and by asking impromptu questions. Over the medium-term, organisations such as ours require a strong culture and the ability to bring fresh people in. Our strength is in our collective effectiveness.

We are going to have to work out how we can get away from remote working, but we are not going to go back to where we were. We are going to move to hybrid working. This will lead to new challenges and we are going to have to try to discover how to deal with these challenges. There will be people who will prefer to stay at home, but I know there are many other people who want to come into the office. Diversity and inclusion tend to be about gender and colour, disability and sexuality, but I can see a new diversity challenge in dealing with people who don’t want to come into the office and dealing with people who do. 

What is your perception of the global economy after Brexit and the expectation that a lot of business will move to places like Dublin from the UK? Has this proven to be the case and has Dublin benefited from the so-called ‘Brexit bounce’?

Brexit has led to a lot of financial services coming to Ireland in terms of the arrival of new entities and the expansion of entities that are already here. It has to be pointed out that Brexit is not over and the process of financial services adjusting to whatever constitutes the ‘new normal’, is ongoing.  Brexit has had an effect on increasing financial services in Dublin and it might have a continuing effect in the future but this also applies to Paris and Amsterdam. I expect that financial services in the EU will grow more than we would have expected before the Brexit referendum in the UK. This does not mean that London and the UK will not continue to be important financial centres, but I think you will see growth elsewhere in the EU. From a financial services standpoint, the UK’s exit from the EU has been relatively smooth and well-managed from all sides but there are still issues that will have to be debated at political level. 

What is the Central Bank’s view of the departure of some banks, including KBC Bank and Ulster Bank, from the Irish market? Is there a need to fill that gap in the market and have you a strategy to address this issue?

That is a very interesting question. After the global financial crisis, credit availability for Irish SMEs during the recovery phase post-2013 improved dramatically. There were a lot of policy initiatives that were very helpful and, compared to a lot of the rest of the world, the Irish government’s focus in this area was pretty strong. 

We had the establishment of the Strategic Banking Corporation of Ireland (SBCI), the introduction of the Future Growth Loan Scheme, the setting up of the Credit Review Office, and the Loan Guarantee Scheme. All of these things were very important for Irish business. 

One of the interesting things our research has shown is that in the years preceding the pandemic and during the pandemic itself, the drag on credit flows to SMEs seemed to be driven predominantly by a weak demand for financing from SMEs rather than by a weak credit supply on behalf of lenders. In a European context, Irish SMEs had among the lowest application rates for credit. From the point of view of the Irish economy, the most important thing is that there is credit available for businesses to use when they need it and that is why it is interesting that Irish SMEs are slight outliers in terms of their demand.

The departure from the market of KBC Bank and Ulster Bank poses risks for borrowers. Ulster Bank itself was the third largest player in terms of lending to SMEs. Fewer players in the market means higher prices, lower volumes and less service choice. No doubt, the Competition And Consumer Protection Commission will be paying close attention to these developments.

What we are seeing is that digital operators in fintech and non-bank intermediaries are expanding their lending to business. Our own statistics team has found that the share of lending to Irish SMEs from the non-bank sector is already above one third in some sectors. 

Access to alternative sources of finance will become easier, cheaper and faster. Core financing from Irish banks will continue to be absolutely key to Irish business, but it will be interesting to see what impact the competition that is now emerging will have on the wider market. The challenges for the big corporate legacy banks are not dissimilar to what large institutions in other economic sectors are facing. They become big, they become cumbersome and they are suddenly faced by competition from entities that are more agile. I suspect that the Government’s Retail Banking Review will look at some of these issues.

Will these developments pose new challenges for the Central Bank?

We published our new strategy in December 2021. A lot of our focus in the past has been about fixing the problems of the financial crisis. With the new strategy, we are 
going to pivot and increasingly focus on the challenges we will face in the future. One of these challenges is regulating and supervising the rapidly changing financial services landscape. That is going to be a very significant focus for us.

We are already seeing issues that give me cause for concern. Crypto is an unregulated market and there are real risks to businesses and consumers in this area. The regulatory world is gearing up to take action, but it is something that we in the Central Bank are going to keep a very close eye on. Technology is accelerating the need to address the issue of financial literacy. I have always been a proponent of the education system having a component that helps young people to understand how finance works. What I have seen in crypto is the ease of putting your money into some of these ventures. There is an increasing risk, in my opinion, that young people using their mobile phones to access crypto are going to get into trouble.

Would it be fair to say that there is a greater awareness in New Zealand of the role of the government institutions than there is in Ireland?

That may be true, but it would depend on what part of New Zealand you visit. If you go to Wellington, the capital of New Zealand, the working life of the city is dominated by government. When you meet people in the streets of Wellington, you will find that they are working in government or their partners are working in government. This is not necessarily the case in Auckland or in other parts of the country.

Certainly, the Treasury, which I led in New Zealand, had a very strong brand. This stemmed from the fact the Treasury in the mid-1980s and early 1990s played a very large part in the overall reforms that New Zealand went through. I think there is a much bigger commercial sector in Dublin than in Wellington, whereas in Wellington the public sector dominates. 

Can we talk about the challenges of money laundering? Are we doing enough to counter this problem and what can we do to counteract the problem?

It is an issue that we need to address, and the EU has decided to set up a new agency to tackle money laundering. I think we also have to ask questions about how seriously the community views white collar crime. We need regulators, financial professionals and politicians to align themselves to dealing with money laundering. In my view, the whole issue of the conduct of financial services, particularly in banking, has to be addressed. As a community, we need to say that money laundering is unacceptable and we need to do something about it.

Thank you for taking the time to speak to us today, Governor.

Thank you.