* Elderfield hired to clean up system after banking collapse
* First foreigner in charge of regulation in Ireland
* Regulator has key role in cleaning up bad debt mountain
By Laura Noonan and Conor Humphries
DUBLIN, April 9 (Reuters) - Ireland's financial regulator Matthew Elderfield said on Tuesday he would quit after three years in which he overhauled a dysfunctional system of bank oversight and pressed lenders to deal more quickly with bad debts.
Elderfield was hired in 2010 to overhaul a watchdog that had failed to rein in years of reckless lending that pushed the Irish economy and banking sector to the brink.
A British citizen, he was the first non-Irish person to take the role and his appointment signalled a shake-up for the country's close-knit banking community.
"He was a very good official, a very good regulator. I'm sorry to lose him," Finance Minister Michael Noonan told Reuters. Elderfield will step down in six months.
The appointment of his successor will be closely watched for signs of whether the central bank intends to become more aggressive in its push for banks to deal with soured mortgage debt following the sector's relative stabilisation.
The key will be whether it plumps for another outsider, said Lorcan Roche Kelly, the Irish-based chief European strategist at research firm TrendMacro. "You need someone who is willing to push the banks quite hard," he said.
Elderfield's resignation comes weeks after he announced binding deadlines for Bank of Ireland, Allied Irish Banks and permanent tsb to address troubled mortgages, saying the central bank would force them to write down the value of housing loans if measures proposed were deemed unsustainable.
Elderfield declined to comment on his plans. He had previously made clear that he only intended to spend a few years in Ireland.
Some of Elderfield's functions may be transferred immediately depending on what his future employment plans are, Noonan said.
Elderfield, whose salary of 340,000 euros is higher than that of his boss, central bank governor Patrick Honohan, has waived a 100,000 euro bonus, which he was entitled to at the end of his contract. Honohan earned 213,000 euros in 2012.
When Elderfield arrived, Ireland had earned the moniker "The Wild West of European Finance" for the scale of its banking problems, which eventually triggered a sovereign bailout. One member of parliament said the country didn't need foreigners telling it what to do.
Among alleged violations under the previous regulator, investigators are probing whether executives at Anglo Irish Bank, since closed, unlawfully gave loans to a group of high profile investors to buy shares in the bank and whether deposits from another lender were used to mask large withdrawals.
"Before the crash financial services operated in a fog of opacity, an environment in which they did whatever they wanted. His arrival has dramatically changed that landscape," said Constantin Gurdgiev, a lecturer in finance at Trinity College, Dublin.
"The challenge now with his departure is can we stay the course? We have to be prepared to take more aggressive steps."
During his time as regulator, Elderfield introduced stiffer fines and boosted staffing at the regulator, which he said was surprisingly poorly resourced when he arrived.
He has called for a re-evaluation of financial crime laws, saying delays in prosecuting those involved in the collapse of the banks were undermining public confidence.
Elderfield oversaw the shuttering of Anglo and fellow lender Irish Nationwide under an EU-IMF bailout and helped to manage the shrinking of other lenders to reduce their dependence on emergency funding from the European Central Bank
Before taking the job in Ireland, he was the head of financial regulation in Bermuda and spent eight years at the UK Financial Services Authority.
He is also the alternate chairperson of the European Banking Authority, the European Union regulatory body, based in London.