Speech by Ed Sibley, Director of Credit Institutions Supervision, at the Banking and Payments Federation of Ireland

Gerry Cross spoke on the topic of authorisation after Brexit on 3 October. Details here.

Introduction

Good morning ladies and gentlemen and thank you to the Banking and Payments Federation of Ireland (BPFI) for inviting me to speak at this event.

As you are well aware, there is significant speculation regarding the impacts of the outcome of the UK referendum on its continued membership of the European Union, commonly called “Brexit”.  This reflects the considerable uncertainty that exists regarding:

• the ultimate outcome of Brexit,
• the long term relationship between the UK and the European Union, and
• in the case of Ireland, the direct and indirect impacts of the changing relationship with a key trading partner.
   

In this context, the Central Bank believes it to be important that there is as much clarity as possible regarding our regulatory and supervisory stance with regard to firms that are currently operating in Ireland or considering doing so. 

To help provide this clarity, my colleague, Gerry Cross, the Central Bank Director of Policy and Risk spoke at an event earlier this week on this topic, considering the financial sector in broad terms, and I will cover similar ground, focused primarily on the banking sector.

This morning, I will summarise the Central Bank's immediate priorities, consideration of potential impacts and thoughts on the regulatory framework and our approach regarding firms considering migrating operations from the UK to Ireland, including the approach to authorisations and ongoing supervisory expectations. 

Perspectives and immediate priorities

The UK referendum has caused considerable uncertainty and concern regarding the impact of the UK exiting the European Union.   Part of the Central Bank's role is to assess and mitigate the risks associated with this uncertainty.  Therefore, our work on Brexit started last year, and involved considering both the potential impacts for the wider economy and the financial services sector. 

From a banking supervision perspective, both in the period leading up to the referendum and immediately after the vote, our focus has been on ensuring that those banks that have the most material linkages with the UK have considered and planned appropriately to mitigate potential negative impacts. Beyond share price and currency market volatility, the Central Bank is satisfied that immediate impacts on banks have been limited and have mostly abated in the weeks since the referendum result. 

However, in reality, little has actually happened yet.  We do now have greater clarity on the expected timing of the UK's exit from the European Union and indeed the key priorities of the UK government, but the exact nature of the post exit relationship is still a matter of speculation. 

Nonetheless, as has been covered elsewhere, the Central Bank's view remains that Brexit will, on balance, prove to be negative for Ireland.  While it is very difficult to be precise, the Central Bank forecasts for the Irish GDP growth rate for 2016 and 2017 have reduced by 0.2% and 0.6% respectively, albeit that the overall growth rate is still expected to be strong. The forecast reductions are due to, for example, the still material interlinkages between the Irish and UK economies, particularly from a trade and labour context. Euro / sterling exchange rate fluctuations can also have a significant impact.

From a banking perspective, there are least three connected potential orders of impact:

i)  First order impacts - in the event of a significant downturn in the UK economy, including employment and house price shocks, Irish banks with significant exposures to the UK could experience negative impacts on asset quality, profitability and future growth plans. Consistent with our overall approach to supervision, we are consequently expecting banks to plan on both a base and a plausible stress case basis.

ii) Second order impacts - there are certain sectors of the Irish economy which rely on the UK for the export of goods and services, and may be impacted, for example, through exchange rate movements. This in turn may impact on domestic growth and ultimately repayment capacity, particularly for those borrowers that are more vulnerable, but is not expected to cause systemic issues.  Nonetheless, we expect banks to be proactively engaging with those customers that are potentially facing Brexit related difficulties.

iii) Third order impacts - we do not know what the future arrangements between the UK and the EU will be, but it is safe to assume that the political, regulatory and economic environment banks operate will change as a result of Brexit.  Most obviously, the arrangements for undertaking cross border business may change, impacting on the ability of banks to passport, and determination being required regarding equivalence of regulatory regimes.  Less obviously, the UK has always played an active and important role in the development and evolution of banking regulation and supervision in the European Union, which will no longer be the case.

As nothing has happened yet in terms of defining what an actual Brexit looks like, our supervisory priorities are therefore still focused on ensuring that we understand the potential impacts and that we and the firms we supervise are prepared for plausible outcomes.

One such plausible outcome is the movement of banking business from the UK to other parts of the European Union.

Possible relocation of banks

Given the level of uncertainty I have spoken about, it is to be expected that banks and other financial services firms that may be impacted by Brexit in terms of their ability to undertake business across the European Union are considering their options.  Since the UK referendum, I have met with numerous interested parties, including international regulators, banks, analysts and the press and have frequently been asked about the possibility of banks relocating from the UK to Ireland.  It is the most common question I am asked on this topic.  In answering this question, the following points are important:

• For very good reasons, including those outlined in the former Governor Honohan's 2010 report on The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008^[1], the Central Bank does not have a role in promoting the Irish financial services sector.
• Consequently, the Central Bank has a broadly neutral view as to whether new entrants relocate to Ireland, as a result of Brexit.  In other words, the Central Bank is not looking to encourage or discourage new entrants. This is a job for other organisations with other mandates. But we do recognise that banks have fundamental and legislative rights to operate in this jurisdiction, subject to being to able to pass relevant regulatory hurdles and requirements.
• Banks operating in Ireland, particularly large banks, are in effect Eurozone banks that happen to be located in Ireland.  From cradle to grave they are subject to the same requirements and approach as any bank in any other Eurozone country.  Under Banking Union and through the Single Supervisory Mechanism (SSM), with the exception of third country branches, banks are authorised by the European Central Bank (ECB). They are either supervised directly by the SSM (in the case that they are significant institutions) or under the oversight of the SSM (for less significant institutions). They are subject to a common European rule book, and in the event that they fail, they will be dealt with under the auspices of the Single Resolution Mechanism (SRM).
• This is not to say that the Central Bank has no role to play in the authorisation and supervision of banks operating in Ireland, when it clearly has a very material role.  It is to emphasise that the authorisation and supervision of banks is consistent across the Eurozone and equivalent across the European Union. 
• Therefore, as Governor Lane touched on in his speech at the Institute of International and European Affairs in August, and Gerry Cross referred to earlier in the week, the determining factors as to where banks choose to relocate themselves in full or in part if they are looking beyond London, should not include much consideration of differences in the regulatory environment.  But instead, consideration will include the suitability of different financial centres; availability of skilled resources, political stability, national legal and tax environments; language and cultural factors; infrastructure; quality of life attractiveness; and so on.
   

While the Central Bank does not have a promotional role, it is important that we are open, transparent, predictable and consistent in our engagement with banks considering seeking authorisation in Ireland, or those banks that are already authorised here and are considering expanding their activities. 

In short, we are happy to meet and hold discussions with banks that are seriously contemplating and are advanced in their thinking regarding locating banking operations in Ireland.  We are not in the business of providing free consultancy, but recognise that there is a need for significant engagement between a bank and its regulator before, for example, authorisation applications are formally submitted. 

Authorisation Process

This brings me to the authorisation process.   As I have referred to already, the Central Bank is part of a wider European framework, and for banking, part of the SSM and the SRM. As with all Eurozone regulators, we are bound by the principles of the Basel agreements and their implementation under the Capital Requirements Directives and Regulations (CRDIV and CRR). Since the establishment of the SSM in 2014, the ECB, with input of the Central Bank as the national competent authority (NCA), is the competent authority for the granting and revocation of banking licences.

In practice, this means that each application will undergo a thorough and robust assessment process, which is clear and transparent and in keeping with the principles, processes and procedures of the SSM. 

For smaller banks or less significant institutions, which in Ireland are typically less than €30bn in balance sheet size, the Central Bank will largely be in the lead and the primary point of contact for banks seeking authorisation, and we will engage with our ECB colleagues in the SSM throughout the process.  Our banking policy and authorisation team leads the work and engages with the bank as the application works its way through the authorisation process until a final decision by the Supervisory Board of the SSM is taken.  Ongoing supervision thereafter will be led by Central Bank staff, with the SSM undertaking an oversight role. 

For larger banks, that are likely to be classified as significant institutions (typically with a balance sheet size of greater than €30bn), then the ECB staff within the SSM are likely to be more directly involved in the engagement with the bank during the application process, working with Central Bank staff. Importantly, where a bank is making an application to establish a significant banking operation in Ireland or to materially increase the existing banking operations of a existing licensed entity, this bank will be required to undergo a Comprehensive Assessment, before transfer of direct supervisory responsibilities to the SSM.

The Comprehensive Assessment has two components, an Asset Quality Review and a Stress Test. The results of the Comprehensive Assessment are published and on passing the Assessment the bank in question comes under the direct supervision of the SSM, with a joint supervisory team (JST) created, led by an ECB employee, but largely staffed by Central Bank employees. The Comprehensive Assessment is an intensive process which requires significant resources from both the bank and the regulator, and typically takes six months to complete.

Through the authorisation process, including the Comprehensive Assessment if relevant, the Central Bank and the wider SSM are fulfilling our mandates to take the necessary steps to ensure prudential soundness and to protect consumers.

I have also been asked on a number of occasions how long the authorisation process takes. This is difficult to answer precisely, as it depends on the type of application and when you start counting from. Once a full, completed application is received and accepted, the process should be relatively quick, but in practice, the authorisation process takes many months of engagement, discussion and back and forth on key issues before the application is completed. So measuring on this basis we can expect a longer time horizon of probably at least a year.  

As Gerry Cross outlined earlier in the week, there will be no shortcuts or fast-tracking banks' applications, simply because they have been authorised elsewhere.  We need to determine that the bank is soundly run and resourced, and a good quality authorisation process ensures that we have a good understanding of the business and the risks and how they are managed. 

Indeed, I think that is unlikely that many entire banking entities are going to be looking to exit the UK altogether, and it is much more likely that business lines or parts of existing businesses are moved, impacting on the ability to do a like for like comparison.

Nonetheless, a mature, authorised bank, currently supervised by the Financial Conduct Authority (FCA) and / or the Prudential Regulatory Authority (PRA) is in a good position to understand requirements and expectations of the authorisation process. On this basis, it should be able to submit a good quality application relatively quickly.

I would note that the Central Bank has sizeable experience in dealing with authorisations.  While new banking licence applications have been relatively rare in recent years, the Central Bank regulates approximately 10,000 financial services providers (including banks, credit unions, investment funds, insurance firms, payment intermediaries, etc.) and continues to undertake hundreds of authorisations each year.^[2]

The Central Bank aims to have a clear and transparent approach to authorisations and to this end we publish the ‘Regulatory Service Standards Performance Report’ every six months. This report sets out both the standards to which we are committed in terms of dealing with authorisation applications in the different sectors and our performance against those standards.

Supervisory Expectations

It is obviously important that banks, indeed any firms, that are seeking authorisation have a good understanding of the supervisory expectations, both in terms of submitting an application and also in ensuring it is set up appropriately to continue to meet expectations post authorisation.  

Banks that are considering relocating aspects of their business from the UK to another EU jurisdiction because of Brexit are, through self-selection, almost certain to be undertaking international, cross-border business.  They are typically likely to be relatively structurally complex and there to be a degree of tension between the geographic and licensed footprint and the global or at least international business lines. 

These factors bring sharply into focus local governance arrangements (what is sometimes referred to as 'mind and management'), outsourcing, booking models and risk management frameworks.  It is these areas that are likely to be the subject of most engagement through both the authorisation process and into the ongoing supervision of the bank.    

The Central Bank expects that, among other things:

• senior management and board level executives are fit and proper, substantively present and engaged in the running of the bank,
• local decision-making must be robust and not simply blindly follow instructions from the group,  
• there is sufficient local oversight and control over outsourcing arrangements, and booking practices are understood and well-managed,
• the bank complies with all relevant regulatory requirements,
• a reasonable and prudent approach is taken to the complexity of geographic/ licence/ business line dynamics, which is cognisant of where the risks reside,
• that there is a sustainable and understandable business proposition, supported by sufficient financial resources, and
• there is a clear path to resolvability, either locally or as part of the wider group.
   

In short, if banks are asking themselves what is the bare minimum they need to do to get authorised so that they can carry on with the minimum of disruption to the existing operations, then they are entirely in the wrong mindset.  Obtaining a banking authorisation in Ireland, and indeed anywhere in the Eurozone, requires that the risks that are associated with the business of the bank are demonstrably governed, managed and mitigated in and by the bank and its management.

Challenges

We recognise that banks face significant challenges at this time, particularly in light of the level of uncertainty we all face, not least arising from Brexit.  Decisions regarding moving business lines, locating staff, assessing infrastructure, seeking authorisation, understanding the requirements of compliance with legal and tax frameworks in a different jurisdiction, and so on, are complex and difficult.

As I stated earlier, the Central Bank is committed to providing transparency, consistency and predictability with regard to our responsibilities.  I will add, professionalism, commitment, expertise and challenge with regard to our engagement with banks on this or any other matter. 

We are also alive to the risks to the Central Bank's delivery of its mandate. It is clear that a significant increase in the size of the financial services sector in Ireland has the potential to increase the significant challenges we already face with regard to retention and attraction of appropriately experienced and talented staff. This is particularly the case in the context of the attractiveness of our staff, or those we would like to recruit, to those firms that may be considering moving business to or increasing the size of their operations in Ireland.  These firms are likely to have significantly more flexibility from a remuneration perspective than we do, and so we do need to steel ourselves for further increases in the levels of turnover in some areas of the Bank.  

We will continue to strive to mitigate this risk.  In addition, our membership of the SSM is helpful in this regard, in that we are part of a much bigger system of supervision, supervisory expertise and have the ability to undertake and learn from peer analysis.   The organisation of banking supervision within the Central Bank also mitigates this risk by applying a variety of skillsets and resources to the authorisation and ongoing supervision of banks.  Specifically, this is done through strong day to day supervision, in depth, intrusive and extensive onsite inspections and high quality analytical work. 

Conclusion

In conclusion, Brexit has caused and added to the considerably uncertainty that we face  today.  There is as yet no certainty as to the future relationship between the UK and the EU, but the consequences of Brexit are likely to be far-reaching and play out over many years. 

In this uncertainty, it is difficult to plan and to make decisions, although it remains necessary to do so. The Central Bank remains focused on delivering our mandate and responsibilities to safeguard financial stability and protect consumers. 

When it comes to engaging with banks that are considering material changes to their existing business models or applications for new licenses in Ireland, the Central Bank stands ready to meet the challenges that may arise. We are ready and willing to engage in line with our existing overall aims of ensuring that banks that operate in Ireland have strong, capitally accretive business models over the long-term, have sufficient financial resources, are well governed with effective risk management frameworks in place and are on a path to being resolvable should they fail.

Thank you for your attention

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^[1] See Honohan, Patrick. 2010. The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008

^[2] See Central Bank of Ireland Annual Performance Statement for more detail (Annual Performance Statement 2015 )