The Future Development of Regulatory Structures in Ireland's Financial Services

1. 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

2. 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.

3. 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.

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. International Financial Services • A specific differentiated regulatory focus will be required in relation to International Financial Services located in Ireland.

10. 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.

11. 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.

12. 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.