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Prudential regulation is now, more than ever, essential. Discuss.

Prudential regulation is now, more than ever, essential. Discuss.

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An essay for the 2012 Undergraduate Awards Competition by Lorcan Hurley. Originally submitted for BCL (International) , with lecturer Dr. Oliver Mills in the category of Law
An essay for the 2012 Undergraduate Awards Competition by Lorcan Hurley. Originally submitted for BCL (International) , with lecturer Dr. Oliver Mills in the category of Law

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Published by: Undergraduate Awards on Aug 30, 2012
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09/04/2014

 
Abstract
I chose to write my year-long essay on the topic of Banking Law,specifically Prudential Regulation, as I found it to be highly topicaland far more engaging and pertinent than other areas of currentlegal discussion. When I chose this topic I had expected to writean essay which would draw upon a considerable amount of research gathered independently of legal textbooks and Iaccepted that the concomitant support such textbooks affordwould largely be circumvented. I nevertheless hoped to garner atleast some academic direction from a few Irish textbooks on thematter but to my surprise not a single textbook in my collegelibrary offered an accurate and authoritative account of thecurrent state of financial regulation in Ireland. Legal publishinghad seemingly accepted the futility of attempting to catalog andanalyze such a dynamic area of law whereby a textbook releasedonly three months ago could already be obsolete. Stemming fromthis realization, I obtained the majority of my legal commentaryfrom online sources such as Westlaw and Lexis while I alsoavailed of some excellent reports written by Peter Nyberg andPatrick Honohan amongst others. These reports coupled with myown modest economic understanding form a considerable part of the essay and my subsequent conclusions owe much to theconsiderations highlighted by these writers. Such is the fluidity of regulatory law, especially at EU level, that I encounteredlegislation which was due to be amended within days after thedeadline for my college submission (I have since updated thisessay). To elucidate the direction and focus of the essay; itessentially seeks to outline and assess the current state of prudential regulation at Irish and EU level while also evaluatingthe benefits of efficient prudential regulation to the Irish financialsystem. In addition, the essay discusses prior systemic failingsand also refers briefly to important international developmentswhich could serve as persuasive precedents in the Irish context. Iam confident that this essay offers a well-balanced and wellthought-out account of an area of law which can often beproblematic to research given the consistently cacophonous callsfor reform at EU and domestic level.
 
Prudential regulation is now, more than ever, essential.Discuss.
 This essay seeks to affirm the imperative value of prudentialregulation in the Irish banking system. The shortcomings of theformer Irish system of regulation will be examined whileacknowledging the role international regulation plays in thisregard there will also be an evaluation of EU and internationallegislative action prior to the financial crisis. Subsequentdomestic and international reform will receive analysis andfinally, this essay will posit as to the future of regulation inIreland. This essay contends that regulation in Ireland prior to 2008 cannot be characterised as ‘prudential’. The source of the financialcrisis in Ireland was initially identified by the Irish Government asa global crisis reaching our shore having been heavily influencedby the bursting of the US property bubble and the collapse of Lehman Brothers. Why, however, did Ireland experience such assharp economic contraction as compared to other EU stateswhich were seemingly exposed to the same financial contagion? The particularly severe Irish financial crisis which hasnecessitated an
 €
85 billion bailout from the EU can be attributedto a large extent to a lack of prudential regulation and financialsavvy. Honohan does however outline other factors contributingto the Irish financial crisis such as a macroeconomic imbalance
 
and an over-reliance on construction induced tax revenue.
1
Indeed the Nyberg Report states that the speed and severity of the Irish crisis was exacerbated by world-wide economic eventsbeyond domestic control
2
however this essay subscribes to theview of Regling and Watson who note that there was scope tomitigate the risks of a boom/bust cycle through prudent fiscal andsupervisory policies, as well as strong bank governance – thusraising the chances of a ‘’soft landing’’ for the property marketand for society at large.
3
 Prudential can be defined as careful, of relating to good judgmentor showing care and forethought. In a financial context prudentialregulation can therefore imply savvy financial planning andconscientious oversight. The concepts of supervision andgovernance are also interlinked with prudential regulation.Ireland and its own financial system having been “caught up inthe mass psychology of an unprecedented property bubble”
4 
found itself exposed to massive solvency and liquidity risksrequiring unprecedented State recapitalisation
5
which shouldhave been at least mitigated by means of effective prudentialregulation. This essay contends that a new regulatory frameworkmust be introduced and an enlightened attitude to regulationshould be adopted by banks and financial regulators alike.
1
Patrick Honohan, “The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008”(2010) at pg 6
2
Peter Nyberg, “Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland” (2011) at pg 91
3
Klaus Regling and Max Watson, “A preliminary Report on the sources of Ireland’s Banking Crisis”(2010) at pg 5
4
Patrick Honohan, “Resolving Ireland's Banking Crisis” (2009) 40(2)
The Economic and Social  Review 207 
at 209.
 
5
Karen Collins, “Irish Financial Regulation: Failures and Reforms” (2011) 18 (6)
Commercial Law Practitioner 
at pg 1

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