Introduction

Following the banking crisis (2008–2011), the Irish State went through a process of significant fiscal adjustments and structural changes to the banking sector through the introduction of various banking sector supports including a State guarantee of certain liabilities in specified banks and through the State-funded capitalisation of certain domestic banks. In late 2010, the State entered into an EU IMF programme of financial support for Ireland worth €85 billion (the Programme). The restructuring mandated by the terms of the Programme, included the recapitalisation of certain domestic banks, a deleveraging programme, the introduction of consumer protection initiatives (including the modification of personal insolvency laws) and the development of a comprehensive credit-reporting regime. Relatively high levels of personal debt remain and Ireland is currently suffering a shortfall in housing availability.

Since 2011, the Government enacted a broad range of primary and secondary legislation to address issues that arose prior to 2008, to provide more consumer protection and to ensure greater oversight, stability and sustainability of the Irish banking sector. In response to Ireland's financial crisis, the Central Bank of Ireland (CBI) also underwent significant organisational changes.

The Central Bank Reform Act 2010 modified the regulatory framework in Ireland including the CBI's supervisory culture and approach. The CBI's enforcement powers were further enhanced through the Central Bank (Supervision and Enforcement) Act 2013 (the 2013 Act). The CBI has broad enforcement powers designed to deter institutions from acting recklessly and to promote behaviours consistent with those expected in the reformed financial system. The 2013 Act introduced an administrative sanctions regime that included increased monetary penalties. The penalties may be imposed on individuals and regulated firms. Relevant individuals are subject to fines of up to €1 million and regulated firms subject to fines of up to the greater of €10 million or 10% of the previous year's turnover.

Following the introduction of the Single Supervisory Mechanism (the SSM) on 4 November 2014, the European Central Bank (the ECB) became the competent authority for supervising banks operating in Ireland. The CBI operates a risk-based approach to supervision together with direct prudential supervision.

The current primary sources of risk to Irish financial stability are: (1) ongoing Brexit-related risks due to our close links to the UK; (2) mortgage arrears; (3) changes in the international trading and tax environment; (4) a re-emergence of sovereign debt sustainability concerns in the Eurozone; and (5) the potential for elevated risk-taking when the profitability of banks and other financial institutions remains below market expectations.

Regulatory Architecture: Overview of Banking

Regulators and Key Regulations

The regulatory authority responsible for the authorisation and supervision of banks in Ireland is the ECB. Under the SSM, banks designated as 'significant' are supervised by a team led by the ECB, comprising members from the ECB and the CBI. There are currently six Irish banks designated as significant. Banks designated as 'less significant' are directly supervised by the CBI in the first instance but the ECB has the power to issue guidelines or instructions to the CBI and to take over direct supervision of any less significant bank if necessary.

In 2011, the CBI introduced the Probability Risk and Impact System (PRISM), which acts as the CBI's framework for the supervision of regulated firms, including banks. The PRISM system is designed to determine the risk and potential impact of banks on financial stability and consumers. Under the framework of PRISM, banks are categorised as 'high impact', 'medium-high impact', 'medium-low impact' or 'low impact'. The category a bank falls into will determine the number of supervisors allocated to that bank and the level of supervisory scrutiny to which it will be subject.

Applications

Applications for authorisation of banks in Ireland are submitted to the CBI. If the CBI considers that the conditions for authorisation are met, then it will submit the application to the ECB with a recommendation that it is approved. The final authority to grant or refuse the application rests with the ECB. The authorisation of branches of banks from outside the EU is dealt with by the CBI pursuant to domestic legislation. Banks from Member States of the EU are permitted to operate in Ireland, with or without establishing a branch in Ireland, pursuant to the EU's 'passport' procedure which requires a notification to the relevant bank's home state regulator and compliance with certain Irish conduct-of-business rules.

Irish law does not distinguish between retail and wholesale/investment banking. Irish law does not therefore provide for the ring-fencing of retail-banking activities. However, banks are not permitted to engage in any lines of business which have not been approved by the CBI/ECB during the authorisation process. If a bank wishes to engage in an activity which did not form part of its application for authorisation, such bank is required to submit an application to the CBI to extend its authorisation.

Primary Legislation

The primary pieces of legislation applicable to banks in Ireland are the Central Bank Acts 1942–2018 (the Central Bank Acts), the European Union (Capital Requirements) Regulations 2014, the European Union (Capital Requirements) (No. 2) Regulations 2014 (the Irish Capital Regulations), EU Directive 2013/36 (CRD IV) and EU Regulation 575/2013 (CRR). Banks are also required to comply with various pieces of secondary legislation and codes issued under the Central Bank Acts including the CBI's Corporate Governance Code for Credit Institutions 2015 (the Code) and the 2012 Consumer Protection Code (CPC).

The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) is the primary legislation governing anti-money laundering in Ireland and implements the EU Money Laundering Directives. The CBI is the competent authority for monitoring compliance with this legislation by banks and other financial services providers.

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Originally published by GLI

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