Explainer - What is a special purpose entity?

Special Purpose Entity

A Special Purpose Entity (SPE) is a company specially created to fulfil a narrow, specific purpose.

The reasons for setting up an SPE are to:

  •  Hold a pool of assets to act as security (collateral) for loans
  •  Pass the financial risks associated with holding a pool of assets to other entities or investor(s)
  •  Avail of favourable tax circumstances
  •  Create liquidity for an entity i.e. give it easier access to cash.

SPEs often have little or no physical presence, such as an office or full-time employees.

They are also often part of complex chains of companies across a number of different countries.

SPEs and shadow banking

Many SPEs are seen as part of shadow banking, or non-bank financial intermediation as it is now more commonly referred to internationally.

Shadow banking is a term used to describe bank-like activities (mainly lending or activities that support lending) that take place outside the traditional banking sector.

To find out more about shadow banking see our explainer: What is shadow banking?

Are SPEs regulated?

SPEs are not authorised by the Central Bank.

However, the activity of an individual SPE might be affected by certain regulations based on specific activities that they carry out.

For example, if an SPE is required to issue a prospectus (a legal document intended for potential investors) or holds derivatives (a type of financial instrument) it must comply with prospectus regulations and derivatives regulations.

Another example is where an SPE is linked to an investment fund resident in Ireland and is therefore included under investment fund regulations.

SPEs are also subject to company law.

In addition, most SPEs submit statistical returns to the Central Bank in relation to their balance sheets, profits and losses, activities and links to other entities.

This helps us to monitor their activity.

See also: