"Regulatory Transformation" Address by Director of Credit Institutions, Ed Sibley

Good morning ladies and gentlemen.   And thank you to Grant Thornton for the invitation to speak to you all today.   The subject of the event regarding crisis management and prevention, and the need for continued business model development is of huge relevance and significance from a financial supervision perspective. 

Crisis management can be defined as the process by which organisations deal with events that are underway and threaten to materially harm their objectives - or the process by which an organisation deals with an emergency situation. It is typically reactive.  Crisis prevention involves understanding the risks and vulnerabilities that an organisation or system faces, and, within the bounds of risk appetite, reducing the risks and impacts of the crisis occurring.  It is typically proactive.

I would agree that we are transitioning to crisis prevention, but we are doing so at a time when we are still managing the after shocks of the crisis itself.  The patient is still weak and vulnerable, and the crisis and the vulnerabilities it has caused have not fully abated. 

The event today is positioned between yesterday's launch of the Central Bank's Macro Financial Review, and tomorrow's speech by the Central Bank Governor on Technological Innovation and Financial Services at the Financial Service Ireland (FSI) Annual Lunch.  The subjects covered both yesterday and tomorrow are of direct relevance to today's subject matter, and so I will touch on both, but only in brief.

Instead, I will focus primarily on micro prudential supervision, covering:

• the role of the Director of Credit Institutions Supervision,
• a brief look back at the work of last year; and
• the Central Bank's priorities for Credit Institutions supervision.

In doing so, I will outline that while I accept that we are moving from crisis management to crisis prevention, the issues associated with the crisis are still in many ways so current, that we have not completed the transition and there is certainly no room for complacency.  I will also outline my key priorities, and in particular note that there are significant strategic, governance and risk management issues that need our continued attention.  

Director of Credit Institutions Role

Today is my first formal public speech since my appointment in April, and so it is timely for me to at least touch on how I see my role and the requirements of it. 

The directorate is responsible for the supervision and oversight of 337 credit unions, 23 banks and 30 branches, with just over half a trillion euros of assets.  These are both nationally and locally significant entities and we are responsible for ensuring that we continue to effectively safeguard financial stability and contribute to the long term resilience of the financial system in Ireland and Europe through their supervision.  I consider my role in leading the directorate in three main parts:

• overseeing and directing our supervisory efforts for all banks and credit unions operating in Ireland and it is this aspect I will primarily focus on for the remainder of my talk today; 
• engaging in the European framework to seek to influence such that we continue to deliver the right supervisory outcomes; and
• as part of the leadership team tasked with running the Central Bank. 

In other words, my role is to:

• lead, motivate and develop a directorate of over 200 people to deliver intensive, intrusive supervision of banks and credit unions operating in Ireland,
• contribute to the running and strategic direction of the Central Bank and the delivery of its mandate, and
• to effectively engage and influence internationally, particularly within the Single Supervisory Mechanism (SSM).

The Central Bank is staffed by hugely dedicated, highly intelligent people, many of whom are experts in their fields, driven by a commitment to public service and the public good.  Since the onset of the financial crisis a great deal has been achieved, but there remains a lot more to do.  I am consequently, very proud to lead the directorate, highly appreciative of the work of my predecessors and the Central Bank staff and recognise the importance of the tasks ahead.      

Recent Achievements

In starting in a new role, it always pays to look back at what has been achieved, as well as considering the priorities of the future.  Moreover, our successes are primarily private, particularly in supervision; yet if we fail it is very public.  So it is worthwhile considering what has been achieved.

Looking back over 2015, we have effectively embedded entirely new ways of working - within the SSM, and more locally within the Registry of Credit Unions, while at the same time as continuing to deliver effectively in line with our mandate.

As outlined in our recently published 2015 Annual Performance Statement, we have continued to deliver strong supervisory outcomes, including:

• increasing the financial strength across domestic and international banks;
• ensuring continued momentum in the reduction of non performing loans;
• driven significant and proportionate risk remediation in banks and credit unions, based on our ongoing supervisory engagement; intensive and intrusive programme of on-site inspections, and through in depth analytical assessment;
• strengthened the regulatory framework with respect to credit unions;
• supported the necessary restructuring of the credit union sector;
• driven the formulation of executable recovery plans by the banks; and
• meaningfully contributed to the functioning of the SSM, contributing to banking supervision and financial stability beyond these shores.  

Some of the above sounds more like business as usual supervision, than crisis management, and this is true to an extent and a positive development, as far as it goes.  But there is no room for complacency, and context is all important.   We are not yet out of the woods, and significant risks and vulnerabilities remain.

I would also note that we have played a leading role in the completion of the International Monetary Fund (IMF) Financial Sector Assessment Programme, which was completed during 2015 and 2016.  This was a hugely important engagement in delivering the move towards a more normalised relationship between Ireland and the IMF, where we were able to show the continued developments and evolution of our approach to financial stability and supervision across all sectors, post the completion of the EU-IMF Financial Assistance Programme in 2013. 

We are expecting the IMF assessment to be published in the summer, and while we expect that it will highlight there are continued areas for improvement, we also expect it to show the very material progress that has been made in recent years.

We have, in other words, continued to undertake our work through assertive, risk-based supervision, underpinned by the credible threat of enforcement.  We have delivered meaningful outcomes in line with our supervisory strategies and continue to progress against our overall objectives, such that Irish credit institutions:

• have sustainable business models that accrete capital over the economic cycle;
• are governed appropriately, with effective and embedded risk management frameworks in place, and have appropriate cultures;
• have sufficient financial resources; and
• are resolvable without recourse to the tax payer.

I will cover some of these areas in more detail in a moment.   But it is also worthwhile noting that while the direct responsibilities of the directorate are focused on micro prudential supervision, the importance of the credit institutions themselves both economically and societally mean that it has a much broader role, working across the Central Bank from both a financial stability perspective and a consumer protection perspective.  

Or another way of putting it, is that the effective supervision of credit institutions is important precisely because the credit institutions themselves are hugely important.  This means that your roles are important whether you are working in a credit institution or advising them, and just as there are clear obligations on the Central Bank regarding financial stability and consumer protection, so there are clear obligations for each of you.

So I will now move on to the two other key parts of the role. 

The Central Bank's effective engagement within the European frameworks is critical to our delivery of our mandate, including delivering appropriate supervisory outcomes for the firms we supervise.  This is particularly important for banking supervision, working as we do within the SSM, and the move away from local decision-making to centralised decision-making and the use of common methodologies and processes.  The Central Bank has committed to be an active, supportive and influential part of the SSM, and it is critical that the Director of Credit Institutions Supervision is driving delivery of this strategic imperative.  Our supervisory approach continues to evolve and develop within the SSM, and we are also making a significant contribution to it, both through our work on the Irish banks, but also through our contribution to the wider SSM aims in, for example, engagement on multiple working groups, and our membership of the SSM Supervisory Board. 

The Deputy Governor's chairing of the SSM Non Performing Loan (NPL) Taskforce is also a strong example of this influence, in an area that has been identified as a strategic priority across the SSM, and where the Central Bank has a high degree of expertise and experience.    

I will not spend much time discussing the internal aspects of my role, but they are hugely important - to drive and contribute to the leading of the Central Bank to ensure it is delivering its mandate as effectively and efficiently as possible.  In this context, my absolute priority is addressing the resourcing challenges we face in the Credit Institutions Directorate specifically and the Central Bank more broadly, given the constraints we operate under. 

Priorities

Eaten bread is soon forgotten, and while a lot has been achieved, as I have said, we have not yet fully moved from crisis management to crisis prevention.  Furthermore, the Central Bank, and our supervisory approach must continue to develop and evolve. 

To expand a little on the earlier comments, from a supervisory perspective, my priorities are to ensure that we are delivering effective supervision to internationally recognised best practices, such that banks and credit unions have sustainable capital generating business models over the economic cycle, are governed appropriately with effective risk management frameworks, have sufficient financial resources (including under stress) and have the ability to recover from idiosyncratic or system wide shocks, and that we can resolve them if that is not the case.  For the banks, this obviously takes place within the SSM and Single Resolution Mechanism (SRM) constructs. 

And, as noted above, good progress has been made in all of these areas, with much hard work completed by all participants.  But we are still dealing with the legacy of the crisis, and this legacy means fragility and vulnerability to reversal. Having the crisis so close in the rear view mirror, and in some aspects still with us, means that we have daily reminders of the human and economic cost of it. We cannot have a repeat. 

So my attention is most focused on the following:

1) Debt and Non Performing Loans (NPLs)

There is a large amount of momentum behind the progress on the resolution of all but the most deeply in arrears NPLs, which is reflective of the work undertaken by the credit providers, the actions of the Central Bank both before and within the SSM, and the improving economy. 

However, risks remain regarding the high level of indebtedness in the economy.  Ireland remains one of the most highly indebted countries in Europe – considering both private and public debt. While this is improving, it leaves large numbers of people and businesses vulnerable to changes  in their own economic circumstances and wider macro-economic shocks. The high level of NPLs is a continued symptom of the crisis and the tip of a very large iceberg, the even higher level of restructured commercial and mortgage debt is the rest of the iceberg sitting below the surface. 

The Central Bank, including in its role within the SSM, will continue to build on the work that has taken place since 2010 and engage intensively and intrusively on this issue – on both consumer protection and prudential risks, through relevant codes and requirements of lenders to protect indebted and distressed borrowers and through driving the lenders to repair their balance sheets and deal with unsustainable debt through implementing sustainable solutions.  We are also taking actions to prevent recurrence at both a micro and macro level.

Furthermore, the issues of curing, provisioning, write-backs and write-offs remain very live (including in the context of IFRS9), and will be subject to continued high levels of scrutiny and challenge.

2) Strategic and business model risk

As noted earlier, the Governor is discussing technological innovation in his speech tomorrow.   It is highly relevant, and anticipating, understanding, and considering the risks associated with the astonishing pace of technological change and the impact it will have on financial services firms is incumbent on us all.  We will continue to prioritise our work in this area both from a business model perspective, but also from a risk management perspective, and to be blunt, we are not in as good a shape as we need to be - even in dealing with legacy infrastructure management. 

I would also note that the regulatory response to the crisis has resulted in further business model pressures, with:

• significant increases in capital and liquidity requirements for regulated firms,
• new conduct and consumer protection regulations and costs,
• a complete change in the regulatory landscape, including Banking Union; and
• a new focus on resolvability, with associated costs.

Moreover, Banking Union, comprising for now, the SSM and the SRM, is still in its infancy.  While a huge amount has already been achieved by the SSM and the newer SRM, their approaches are still developing and embedding, and so, at the very least present some degree of uncertainty for those subject to their oversight.  We are not done yet, with Capital Markets Union (CMU) to come, and further work being undertaken by the FSB and EBA, and the Basel Committee, to name but a few. 

To expand on CMU for a moment - clearly, diversity in financial products and service, including market-based as well as credit institution based finance, best serves the population's broad needs.  Across the European Union, we have traditionally relied to a high degree on credit institution based finance, for households and businesses.  Reducing reliance on credit institution based financing is - all other things being equal - better for economic choice and resilience. The drive for CMU in the European Union, includes this aim, with resultant risks for traditional providers of credit institution based financing and the sustainability of their business models.

Furthermore, for both banks and credit unions, other business model vulnerabilities remain significant.  The credibility, coherence of strategic thought and planning, and business risk management remain in sharp focus - as do the risks relating to the temptations to push the risk envelope in the pursuit of margin and fee income.

Recovery planning and resolvability are also important considerations in this topic, as the executability of both should inform both firm and regulator risk appetite with regard to pursuing new business lines and opportunities.

3) Governance, Risk Management and Culture

So, I admit, this is really three (and arguably more) topics rolled into one.  It is also, I am sure, not particularly insightful or revelatory for you to hear that the regulator is interested in governance and risk management arrangements and the culture of firms.  That does not make them any less important.  But I will limit my comments, to a couple of points:

-      first, I would emphasise the importance of individuals and firms being able to demonstrate that they have appropriate and effective arrangements in place - namely prove it and show the evidence of challenge and the outcomes from that challenge; for example considering:

• evidence behind the effectiveness of the control functions' challenge of the front line; and
• how the Board, the CEO, CFO, CRO know risk appetite is being lived, being translated into business practices, and how can they evidence the same.

-      secondly, we have seen pockets of activity demonstrating over optimism and lack of consideration of downside risks where one would question whether the lessons from the crisis have been truly remembered - it is incumbent on us all that they are never forgotten;

-      thirdly, the evidence from our ongoing supervisory engagement, inspections, analysis and other work shows that there is still much work to be done, and some of the previous risk mitigation required by the Central Bank has not been fully embedded; and

-      finally, culture and diversity are closely linked areas of increasing focus both from a symptom and root cause perspective; taking each in turn:

-      It is clear that cultural issues are frequently linked with firm failures, and this was certainly the case in the banking failures in Ireland.  The SSM is developing its approach in this area, learning in particular from the leading edge approach in the Netherlands, and we will be undertaking behaviour and culture inspections in the Irish banks in due course, as well as developing our wider Central Bank thinking on this important topic.

-      There is also sufficient weight of evidence to suggest that a lack of diversity (be it gender, race, experience and so on) results in less successful and sustainable business outcomes, for this to be of interest from a supervisory perspective. It is certainly the case that from a diversity perspective, senior management in the banks operating in Ireland are not representative of the demographics of the country.  As we move from crisis management to crisis prevention, this will become an increasingly important topic.

4) Financial Resources

Finally, while there are root causes for any failure, all failures crystallise through a lack of financial resources to deal with or provide the time to deal with whatever the underlying issues are.  The capital and liquidity regulatory landscape has been subject to significant change and has not yet quite settled, but however it evolves, capital and liquidity will of course be a cornerstone of our supervisory approach. Stress testing will continue to be an important aspect of this regime.

Conclusion

Many of the topics I have covered today warrant discussion in their own right.  It is my intention to return to them in future speeches and discussions.   In the meantime, I will conclude by stating how passionately I feel about:

• working in the Central Bank;
• the importance of our work;
• and the need for us to continue to develop and evolve to continue to deliver our mandate effectively.

I have found the last four years hugely challenging and rewarding, and have learnt a great deal, particularly in combination with my time spent with the UK regulator.  Much as working in a control function in some institutions is a precursor to advancement to a senior level, work in the Central Bank gives a unique and endlessly interesting insight into the financial services sector. I would unequivocally recommend it, as a place to build a career, but also as place to enhance a career.

While I am naturally an optimist, my job, is to do precisely the opposite, to be pessimistic.  I do worry, and a key part of my job, is to, as the Deputy Governor of Central Banking noted last week, be prepared to lean against the wind.  I will continue to do so and drive us to challenge, question and hold to account on the areas I have highlighted and many others.  But equally, I am happy that you should have the opportunity to do likewise, and I look forward to continue to engaging with you all on this basis.

Thank you for your attention.