The Future Development of Regulatory Structures in Ireland's Financial Services Alan Ahearne Special Adviser to the Minister for Finance ACOI Top Economist Round Table 25 February 2010
Outline • Some lessons from the crisis. • Reform of the institutional structures for financial regulation in Ireland. • Reform of the EU’s financial supervisory and regulatory framework.
Macro-financial imbalances • Bubbles often spurred by financial liberalisation. • Concentration of credit. • Developments in housing finance. • 100% mortgages, sub-prime lending. • Unrealistic expectations of continuing house price appreciation. • Both borrowers and lenders.
60 50 40 % of GDP 30 20 10 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Unrestricted credit growth funded by wholesale financial markets facilitated a property bubble Net foreign liabilities of Irish banking system
Principles-led supervision • Considered as international best practice. • But at the very least requires the following at regulated firms: • Prudent risk management. • Appropriate management and controls. • Ethical behaviour and transparency in reporting business dealings by boards and senior management.
What is needed to strengthen the system? • Close integration of macro- and micro- prudential. • Significantly more intensive and hands-on regulatory approach. • Regulatory staff with the necessary skills.
Reform of the institutional structures for financial regulation in Ireland • Establish the Central Bank of Ireland as a single fully integrated structure with a unitary board – the Central Bank Commission. • Central Bank Commission will be responsible for both the supervision of individual financial firms and the stability of the financial system overall. • Assignment to the National Consumer Agency of the current role of the Consumer Director.
Reform of the institutional structures for financial regulation in Ireland • Two new high-level posts: a Head of Financial Supervision and a Head of Central Banking. • Significant expansion of regulatory capacity. • Substantial additional staff with the necessary skills, experience and market-based expertise.
International Financial Services • A specific differentiated regulatory focus will be required in relation to International Financial Services located in Ireland.
EU reforms (ESRB) • European Systemic Risk Board • Responsible for macro-prudential oversight of the financial system within the EU. • Identify risks, issue (non-binding) warnings, recommend actions.
EU reforms (ESFS) • European System of Financial Supervisors • Network of national regulators. • European Supervisory Authorities covering banking, securities and markets, and insurance and occupational pensions. • Draw up new rules, enforce EU legislation, mediate in disputes between national regulators.
Conclusions: Reforms aim to… • Underpin confidence. • Have more responsible and transparent management and lending policies in financial institutions. • Support the availability of appropriate credit to businesses and individuals. • Ensure a more focused financial services sector that acts in the interests of customers and the economy as well as shareholders.