1. Banking – Past, Present and Future – Remarks by Deputy Governor Sharon Donnery at the Banking and Payments Federation Ireland
On 31 July 2024, Deputy Governor of the Central Bank of Ireland ("Central Bank") Sharon Donnery gave a speech at an event held by the Banking and Payments Federation Ireland ("BPFI"). The theme of the speech centred around the ten year anniversary of the Single Supervisory Mechanism ("SSM") of the European Central Bank ("ECB").
Noting that Ireland is now 15 years on from the financial crisis and that it has been 10 years since the establishment of the SSM, the Deputy Governor highlighted the following developments:
- the regulatory framework has been enhanced;
- balance sheets have been cleaned up and strengthened; and
- resilience has been strengthened and tested.
With regards to the health of the Irish banking sector, Deputy Governor Donnery specifically addressed two metrics that illustrate the journey that the sector has been on as follows:
- non-performing loans ("NPLs"): The Deputy Governor noted that after the financial crisis the Irish banking sector had an extraordinary level of NPLs. Further, she highlighted that, due to effective and intrusive supervision and restructuring by banks themselves, the NPL ratio today is at just over 2%.
- capital adequacy: the last ten years have seen strong capital buffers built into the financial system. There is now an additional €23bn worth of loss absorbing capacity within the three Irish pillar banks. The overhaul of the liquidity framework for banks has resulted in banks now holding higher levels of high quality liquid assets in order to meet outflows in stress environments.
As regards lessons learned from the past, Deputy Governor Donnery reflected on the importance of all the actions taken to strengthen the banking and wider financial sector. She also sounded a note of caution and cited the recent shift back towards industrial policy and competitiveness. While welcoming competitiveness, the Deputy Governor warned about the dangers of chasing short term growth through de-regulation and emphasised the desirability of a robust financial sector.
Deputy Governor Donnery addressed the topic of profitability and distributions, noting that profits are an important benchmark for regulators as a safe bank needs to be a profitable one over the long term, generating sufficient income so as to be able to invest in its future and meet the evolving demands of consumers. She touched on the fact that higher interest rates have led to higher profits but warned that that has not necessarily made bank business models any more sustainable. Importantly, Deputy Governor Donnery highlighted the point that higher interest rates cannot be relied upon into the future. As regards distributions Deputy Governor Donnery emphasised that they play an important role in the stability of the financial sector, observing that well capitalised banks will rightly seek to make distributions to shareholders and that such distribution decisions are for firms to decide themselves.
Deputy Governor Donnery discussed the changing financial system and pointed to the increasing digitalisation of the sector. She addressed the need for banks to be able to adapt in a changing and increasingly digital society and in that regard, highlighted that strategies, systems and digital infrastructure should be transformed to ensure banks remain operationally resilient and able to meet increasing consumer demand and expectations for digital financial services.
In addition to digital change, Deputy Governor Donnery noted the impact of climate change and demographics which she stated can "strike at the heart of bank balance sheets", and the geopolitical instability of recent years. She stated that these challenges only look set to accelerate and are likely to test the banking sector and its ability to continue to safely perform its role in our economy.
With the forgoing in mind, Deputy Governor Donnery addressed the way in which the Central Bank is responding to change, noting that in its Strategic Plan, the Central Bank recognises the need to "keep pace with the changing world and continue to deliver on our mandate." A fundamental aspect of this has been the Central Bank's transformation of its approach to regulation and supervision. She noted the following work carried out over the last two years:
- the introduction of a significant step change in its external engagement including being more transparent, explaining itself better and increasing the clarity of expectations;
- improvement of its approach to authorisations: increasing engagement and responsiveness, and significantly improving the Central Bank's process in this regard;
- enhancement of engagement with innovation in financial services, noting the innovation sandbox programme set to be implemented later in the year;
- introduction of the Individual Accountability Framework; and
- the review of the Consumer Protection Code.
In addition, Deputy Governor Donnery pointed to the Central Bank's new supervisory model, noting that while it will remain risk based, it will deliver a more integrated approach to supervision taking account of consumer and investor protection, safety and soundness, financial stability and integrity of the system.
In her closing remarks, the Deputy Governor stated that "given the pace of change, now is not the time to lag behind. For its part, the Central Bank is seeking to respond to this changing environment. So must you."
For more details on the Central Bank's update on the transformation of its approach to regulation and supervision, please see the entry above in this week's Top 5 at 5.
2. Central Bank of Ireland – Transforming Regulation and Supervision
The Central Bank of Ireland ("Central Bank") recently provided an update ("Update") on its plans for transforming regulation and supervision as previously set out in its strategic plan ("Strategic Plan").
In its Strategic Plan, the Central Bank set out four key areas of focus as regards its aim of transforming its approach to supervising the financial services sector. They include:
- acceleration of the evolution of its risk-based supervisory approach such that it becomes more data-driven, agile and scalable;
- the harnessing of innovation in how the Central Bank works through developing its data and tools (including supervisory technology);
- the anticipation and support of innovation in financial services; and
- preparation for new EU anti-money laundering requirements and the establishment of the new EU agency AMLA.
In the Update the Central Bank pointed to progress made over the last two years to include the following:
- enhanced engagement with innovation in financial services; and
- changes to communications with industry and wider stakeholders – including increasing transparency and the clarity of Central Bank expectations.
The Update sets out a new supervisory model and will include seven directorates, which will report to the existing Deputy Governors for Financial Regulation and Consumer and Investor Protection, as follows:
- there will be three directorates with responsibility for
sectoral supervision. All three will have integrated teams with
responsibility for all elements of the Central Bank's mandate
and supervising risks as they relate to the relevant sector. The
three directorates will be as follows:
- a Banking & Payments Directorate;
- an Insurance Directorate; and
- a Capital Markets & Funds Directorate.
- there will be a Horizontal Supervision Directorate. This
Directorate will provide specialist input on key cross-sectoral
risks such as:
- conduct, behaviour and culture;
- anti-money laundering and terrorist financing;
- financial resilience; and
- operational resilience and technology risks.
This Directorate will work in partnership with the sectoral supervisory teams.
- Additionally, there will also be the following directorates:
- a Supervisory Risk, Analytics and Data Directorate;
- a Policy and International Directorate; and
- an Enforcement Directorate.
The supervisory model will remain risk based but the Central Bank states that it will evolve " to deliver a more integrated approach to supervision, drawing on all elements of our mandate (consumer and investor protection, safety and soundness, financial stability and integrity of the system)."
Next Steps
The Central Bank plans to implement the forgoing changes in early 2025. The Central Bank has stated that, as the work progresses, there will be further information and engagement with stakeholders to explain the changes over the coming months.
3. Access to Cash Bill is published
On 31 July 2024, the Finance (Provision of Access to Cash Infrastructure) Bill 2024 ("Bill") was published by the Department of Finance.
The Bill aims to ensure that sufficient and effective access to cash is available in the State, and that any further evolution of the cash infrastructure will be managed in a fair, orderly, transparent and equitable manner for all stakeholders.
The Bill emanates from the a Retail Banking Review ("Review") recommendation, published in November 2022. That recommendation highlighted the continuing importance of cash, specifically pointing to the following concerns:
- ensuring people do not experience financial exclusion, allowing consumers to budget efficiently; and
- the need for a safety net in the event of electronic banking, or the payments infrastructure, being impacted by outages or cyber-attacks.
The published Bill establishes that access to cash will be maintained, at the start, at approximately December 2022 levels. It places an obligation, initially, on the three main retail banks, to ensure in each of the NUTS 3 regions (geographical area in the State that is classified as NUTS level 3 in accordance with Regulation (EC) No. 1059/2003) that:
- a specified percentage of the population must be within no less than 5km and no more than 10km of an ATM;
- there is a specified number of ATMs per 100,000 people; and
- a specified percentage of the population must be within no less than 5km and no more than 10km of a cash service point – either a bank branch or a post office.
The Bill provides for the identification of, and measures to be taken to remedy, local deficiencies in access to cash infrastructure and to ensure compliance with the access to cash criteria. It also provides for the designation of entities on whom certain obligations are imposed to remedy such local deficiencies and ensure compliance with the access to cash criteria.
New categories of firms requiring authorisation are set out in the Bill - ATM deployers and cash-in-transit providers ("CITs") will be regulated and registered by the Central Bank of Ireland ("Central Bank"). This will permit the Central Bank to make regulations introducing service standards for all ATM operators in relation to matters such as:
- hours of operation;
- operational resilience; and
- bank note denomination stocking.
Reviews of the access to cash criteria will be carried out following the publication of final Census population data, if cash demand drops by 15% in a calendar year compared to the previous year, or at the request of the Minister for Finance. A review may also be carried out on the Central Bank's own initiative.
In welcoming the publication of the Bill, Minister for Finance, Jack Chambers TD, stated that:
"It is imperative to ensure that cash remains widely available and accessible, protect the economy when technology is not a viable option, and ensure that those who rely on cash can do so into the future. That is why the Finance (Provision of Access to Cash Infrastructure) Bill 2024 aims to put in place a framework to ensure continued sufficient and effective access to cash in the State."
4. EIOPA consults on the implementation of the new proportionality framework under Solvency II
On 2 August 2024, the European Insurance and Occupational Pensions Authority ("EIOPA") published a public consultation on the new proportionality framework under Solvency II. The need for this consultation arose on the back of a request from the European Commission ("Commission") in April 2024 for EIOPA's technical advice on the implementation of the framework having regard to:
- the methodology to be used when classifying undertakings/groups as small and non-complex; and
- the conditions for granting or withdrawing supervisory approval for proportionality measures to be used by undertakings not classified as small and non-complex undertakings/groups
At a high level the following are the conclusions that EIOPA reached:
- EIOPA is of the opinion that the proposed methodology is clear and comprehensive, and that there is no requirement for further specifications on categorising insurance undertakings and groups as small and non – complex.
- In relation to the conditions for authorising the use of proportionality measures for insurers not categorised as small and non – complex, EIOPA explained that it reviewed three alternatives as follows:
- no change to be made;
- introduce conditions based on a qualitative approach only; and
- adopt a hybrid approach, introducing conditions based on both qualitative and quantitative approaches.
EIOPA concluded that a hybrid approach was the most effective as it would offer a fair balance between predictability/convergence in the application of the new framework, on the one hand, and allowing for supervisory judgement/risk-based supervision on the other hand. In addition, EIOPA maintained that this option allows supervisory authorities to take into account the scale of the undertakings in line with the overall principle of proportionality, establishing that requirements shall be applied in a manner that is proportionate to the nature, scale and complexity of the risks inherent in the business of the undertaking.
We are currently considering the conditions proposed by EIOPA in more detail and will update the Matheson Insights page with a dedicated insight on same in the coming days.
Next Steps
The consultation is open for feedback and will close on 25 October 2024. After which EIOPA will prepare its final advice for submission to the Commission by the deadline of 31 January 2025.
5. ESMA delivers opinion on global crypto firms using their non-EU execution venues
On 31 July 2024, the European Securities and Markets Authority ("ESMA") published an opinion ("Opinion") addressing the risks associated with global crypto firms seeking authorisation under the Markets in Crypto Assets Regulation("MiCA") for brokerage services, while keeping a considerable amount of their group activities outside the European Union ("EU") regulatory scope.
ESMA is aware that there are risks associated with the complex structures of global crypto firms where execution venues fall outside the scope of MiCA. Within these structures are the association of an EU authorised broker routing orders to an intra – group execution venue situated outside the EU, possibly resulting in diminished consumer protection and an unlevel playing field with EU – authorised execution venues. Having regard to this, ESMA proposes that National Competent Authorities ("NCAs") should complete the authorisation process with caution and evaluate the business structure of global firms to guarantee that they do not neglect requirements established in MiCA, which are in place to protect consumers and ensure transparent and orderly functioning of crypto markets.
The Opinion proposes a case – by – case evaluation, highlighting the specific obligations that should be reached relating to:
- best execution;
- conflicts of interest;
- the obligation to act honestly, fairly and professionally in the best interest of the clients; and
- the requirement in relation to the custody and administration of crypto – assets on behalf of clients.
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