Prepared by Mark Lutz.
This note updates “Structure and Performance of the Financial Sector,” Chapter V of Ireland: Selected Issues and Statistical Appendix, IMF Staff Country Report No. 99/108, October 1, 1999.
The IFSC, established in 1987, has developed into a significant center for a wide range of internationally traded financial services. The distinguishing feature from the rest of the financial system is qualification for tax advantages including a reduced (10 percent) rate of corporate taxes, relief from local municipal taxes, and tax relief for capital expenditure and rents on property. However, this distinction will disappear beginning in 2003 with the harmonization of all corporate tax rates at 12½ percent (with a grandfathering until 2005 of the 10 percent rate for projects begun before 1998). No distinction is made between domestic and offshore operations from a regulatory point of view. There are currently about 490 stand-alone projects in operation at the IFSC, employing in excess of 11,000 people.
Although no limits are imposed on open position in foreign currencies, capital adequacy requirements are imposed on open foreign exchange positions. Off-balance sheet items are included in the calculation of the open position.
According to the OECD Economic Outlook No. 70 (Dec. 2001), mortgage credit outstanding as a percentage of annual disposable income in Ireland was 55.5 percent at end-2001, compared to 55 percent in France, 71 percent in Germany, and 108 percent in the United Kingdom.
The reporting of off-balance sheet items is in accordance with the provisions of the EU solvency ratio and capital adequacy Directives, which set out requirements in relation to calculating the credit equivalent amount and application of applicable risk weightings to capture credit and market risks. In the case of interest-rate and foreign exchange related items these are marked-to-market in determining the appropriate credit equivalent. The credit equivalent amounts of these accounts has averaged 8–9 percent of total assets during 1998–2001.
In early 2002, AIB reported a loss of $691 million due to fraudulent trading at its subsidiary U.S. Allfirst Bank. Upon discovery of these events, the parent bank immediately estimated the losses and informed the regulatory authorities in both countries and the markets about the situation. In the event, the financial stability of the AIB group is not in question, with only a temporary dip in the risk-weighted capital adequacy ratio. In addition, the U.S. subsidiary and parent bank have worked closely with the U.S. Federal Reserve in investigating the events and resolving outstanding legal and regulatory issues.
In addition, Revised Guidance Notes for credit institutions relating to money laundering were issued in November 2001. Following the events of September 11, a set of eight special recommendations on terrorist financing were agreed by the international Financial Action Task Force (FATF). The Central Bank subsequently advised financial institutions in Ireland of these recommendations, and the government is preparing enacting legislation.
This, as well as other relevant legislation and regulations, are available on the Central Bank of Ireland’s supervisory webpage, http://www.centralbank.ie/supervision.asp.
The Central Bank had at end-2001 185 staff involved in financial system supervision, of which 35 were involved in banking supervision, and some 64 staff supervising IFSC funds.
See Frank Browne and others (2002), “A Framework for Macro-Prudential Indicators,” Central Bank of Ireland.