Central Bank publishes three Behind the Data papers examining the international activities of the Irish financial sector

• Recent increase in cross-border financial assets is largely due to migration of assets from UK banks to subsidiaries in Ireland, to continue to serve EU clients after Brexit.
• Paper examining the strength of the connectedness of Irish insurance sector and investment funds finds insurers primarily hold shares in equity, bond, and mixed funds.
• The Irish non-bank financial intermediation sector – as measured using a Financial Stability Board framework - is the fifth largest in the world.

The Central Bank of Ireland has today (20 January 2022) published three Behind the Data papers. Each paper covers a specific, internationally active part of the Irish financial sector; that is, cross-border banking, insurance corporations, investment funds and other non-bank financial intermediaries. Given the size of these sectors and the open nature of the Irish economy, the Central Bank has an important role in monitoring and understanding the activities of these financial entities.

The first paper, entitled “Understanding the surge in resident banks’ cross-border financial assets since 2018” and authored by Bernard Kennedy, investigates the increase in cross-border financial assets between Q1 2018 and Q3 2021. Locational banking data shows that cross-border financial assets have increased by almost €180bn in that time. However, the paper finds that this increase is due to the migration of assets from UK banks to their subsidiaries in Ireland (largely as a result of Brexit) rather than any increase in new loans or credit lines originating in Ireland.

Further, the increase in banks’ cross-border financial assets is almost entirely attributable to just two financial instruments – loans and deposits, and derivatives – as well as three banks. Crucially, these banks have a foreign parent, and therefore limited exposure to the Irish indigenous sector. Nevertheless, the increase in the size of these entities has implications for supervision and macro-prudential policy. The paper therefore concludes that the development of a narrower set of banking statistics to distinguish between banks where the ultimate parent is incorporated in Ireland, and those where it is incorporated abroad, would help to guide policymakers.

The second paper, “Through the looking glass: understanding the interconnectedness of the Irish insurance sector and investment funds”, is authored by Luke Kent and Róisín Flaherty. The paper provides new insights on the underlying financial exposures of insurance corporations and their policyholders from their investments in investment funds. More specifically, the paper looks at the underlying asset class of funds to gain a more accurate picture of the geographic exposures of insurers.

The paper finds Irish insurers primarily hold shares in equity, bond, and mixed funds; with hedge, property, and other specialised funds accounting for relatively small exposures. Looking at the underlying asset class of these funds, the most common categories are equities, government bonds, and corporate bonds. Almost half of the investment fund shares held by Irish insurers are domiciled in Luxembourg; however, just over 5% of underlying assets are issued in Luxembourg. The majority of underlying equities have been issued in the US, while government bonds held by insurers via funds are predominantly issued by euro-area countries.

The final paper published today, “Beyond Big: Measuring Ireland’s Non-Bank Financial Intermediation Sector”, is authored by Matteo Lai and examines the Irish data for the Financial Stability Board’s (FSB) categorisation of the global non-bank financial intermediaries (NBFI) sector. Under a framework developed by the FSB, there are six economic functions that might lead a non-bank to be classed as a potential source of bank-like financial stability risk and/or regulatory arbitrage. The paper looks at three of those functions, which together cover 98.6% of the total Irish NBFI sector:

• The first function is being at risk of “bank-run”-like events. Of Ireland’s NBFI sector, the paper finds that €2,092bn in investment funds and €630bn in money market funds fall into this category.
• The second is engaging in securitisation. Entities falling into this category account for a total of €443bn of Ireland’s NBFI sector.
• The third is non-securitisation special purpose entities providing credit to individuals and businesses, not captured elsewhere. This accounts for €237bn of the total NBFI sector.

The paper shows that a substantial portion of Ireland’s non-bank financial sector is not covered by the FSB’s NBFI measure under this framework. The largest categories excluded are equity funds (€1,006bn), captive financial institutions (€517bn), and insurance corporations (€329bn).

Contrasting this with global data, the paper finds that Ireland’s NBFI sector as defined by this framework is the fifth largest in the world after the US, China, the Cayman Islands, and Luxembourg. Relative to the size of the domestic economy, the Irish NBFI sector was around 9 times GDP in 2020; ranking the third largest of such sectors globally after the Cayman Islands and Luxembourg. Using the modified Gross National Income (GNI*), the Irish figure equates to around 17 times GNI*; highlighting Ireland’s position as an open economy with an internationally-focused non-bank financial system.

Notes to Editor

Behind the Data shines a light on interesting financial and economic trends by taking a closer look at data collected by the Central Bank.

“Understanding the surge in resident banks’ cross-border financial assets since 2018” draws upon locational banking data from the Bank for International Settlements’ Locational Banking Statistics. This data reports the financial assets and liabilities of internationally active banks against counterparties residing in more than 200 countries every quarter on both a residency and nationality basis.

“Through the looking glass: understanding the interconnectedness of the Irish insurance sector and investment funds” uses granular data submitted by insurance companies under Solvency II and ECB Statistical Regulations since 2016 to provide a full look-through into the underlying assets of investments made through investment funds. It focuses on the distribution of these assets by geographical location and asset category.

“Beyond Big: Measuring Ireland’s Non-Bank Financial Intermediation Sector” draws upon a framework developed by the Financial Stability Board (FSB) to measure the subset of entities within the non-bank financial intermediaries (NBFI) sector that may pose bank-like financial stability risks and/or regulatory arbitrage. The FSB is an international body that monitors and makes recommendations about the global financial system. In 2011, following the role of the NBFI sector in the global financial crisis, the FSB introduced a global monitoring exercise and developed a specific framework to measure the sector. In an Irish context, the framework draws on Central Bank Quarterly Financial Accounts and security-level granular data collected on all Irish-resident investment funds, money market funds, and special purpose entities.