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IMF Country Report No. 22/240

IRELAND

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE ON BANKING SUPERVISION

July 2022

This paper on Ireland was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 28, 2022.

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Title page

IRELAND

FINANCIAL SECTOR ASSESSMENT PROGRAM

TECHNICAL NOTE

BANKING SUPERVISION

June 28, 2022

Prepared By

Monetary and Capital Markets Department

This Technical Note was prepared by IMF staff in the context of the Financial Sector Assessment Program (FSAP) in Ireland. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations. Further information on the FSAP can be found at http://www.imf.org/external/np/fsap/fssa.aspx

Contents

• Glossary

• EXECUTIVE SUMMARY

• INTRODUCTION

• SCOPE

• BANKING SECTOR IN IRELAND

• A. Market Structure

• B. Risks and Challenges

• BANKING SUPERVISION IN IRELAND

• A. Introduction

• B. Regulatory and Legislative Framework

• C. Supervisory Independence and Resources

• D. Supervisory Powers

• E. Organization of Supervision

• F. Supervisory Process

• G. Supervisory Approach

• H. Supervision of Credit Risk

• SELECTED ISSUES

• A. Brexit

• B. COVID-19 Pandemic Crisis

• C. Climate Risk

• BOXES

• 1. SSM SREP: Business Models Assessment

• 2. The Central Bank Approach to Problem Loan Resolution

• 3. Industry Measures Taken to Tackle COVID-19

• FIGURES

• 1. Total Assets of Banks

• 2. NPL Ratio of Selected Banks

• 3. EU: Overview of Supervisory and Regulatory Approaches to NPE Coverage

• TABLE

• 1. Main Recommendations

• APPENDICES

• I. Actions Taken by the Authorities to Address 2016 Recommendations

• II. Organizational Chart of the Central Bank

• III Structure of the Irish Banking System

• IV. EU Implementation of Basel III

• V. Overview of the SSM Supervisory Review Process

• VI. Expected Credit Losses – Broader EU Experience

• VII. Overview of House Prices – EU Cross-Country Comparison

• VIII. Supervisory Action to Tackle COVID-19

Glossary

Executive Summary¹

Supervision of less significant institutions (LSIs) is largely effective in Ireland. The Central Bank's supervisory approach to LSIs is intrusive and well-developed supervisory tools are appropriately applied. To enhance the capacity of supervisory tools and approaches, the supervision leverages on its membership in the Single Supervisory Mechanism (SSM). Supervision has sufficient rigor, although some gaps in the enforcement framework yet to be covered by the legislative changes planned for 2022.² The supervisory responses to changing conditions are timely and agile. The expertise of supervisors is expanding with the development of the market, although keeping up its pace can be a challenge. The independence of banking supervision is strong in practice, and benefits from the safeguards of the SSM. Recent efforts to enhance cooperation between prudential and conduct supervision of banks (Central Bank's “One Bank” approach) has raised the quality of supervision, although scope remains for further enhancements to unleash the full potential of integrated prudential and conduct supervisory functions framed by strong cooperation arrangements and operational processes.

The prudential regulation of banks has improved greatly since the 2016 FSAP. The EU framework has largely managed to embrace international regulatory reforms, following up on the causes of the Global Financial Crisis. Additionally, it has responded to legacy issues of some EU banking systems which materialized in heightened volumes of nonperforming loans. The Irish Government provided extraordinary financial support to individuals and businesses in the reaction to the pandemic crisis. The Irish and EU legislators also introduced regulatory flexibility, while maintaining steering principles of their conceptual approach and not slipping to regulatory forbearance. The Central Bank applies the entire SSM regulations to its LSIs, which provides a strong supervisory framework, consistent and proportionate to the framework applied for compared to SI's.

The banking supervision has been tested by severe headwinds, with the final outcomes still in play. Supervision went through a period of major challenges for the economy and the financial system, namely from Brexit and the pandemic. Brexit has shaken up the institutional framework, imported new complexities to the financial system and posed substantial challenges to the economy. Before the economic impact of Brexit had fully settled, the COVID-19 pandemic crisis hit, representing a major threat to financial stability, with secondary impact still gradually materializing. On the back of these developments, climate risk is growing, bringing new challenges across supervisory dossiers.

The continued effectiveness of banking supervision in Ireland will depend on its success in solving several complicated problems. Essentially, banking supervision must find a recipe to accomplish in the following areas:

• Mitigation/management of the impact of the COVID-19 pandemic – banking supervision will need to follow up on latent credit risk with sufficiently intrusiveness to ensure that all relevant indicators measuring credit risks are accurately calibrated, while monitoring capital and liquidity positions with increased intensity.

• Transformation of business and operational models in retail banking services – the situation will require a consistent rigor in the application of the existing core approaches, mostly embedded in the supervisory review process, as well as supplementary tools inspired by an open-minded attitude, and in making conceptual changes in frameworks, assuring consistent and proportionate regulatory and supervisory approaches across financial institutions.

• Continuous upgrades in supervision of international/investment banking – banking supervision has to keep upgrading its capacity in response to the growing size and complexity of international banking businesses, factoring in the benefits of cooperation within the SSM and outside of the EA.

• Constitution of climate-related financial risks supervision – the increasing importance of climate-related risks will shape supervision into the future, requiring a robust approach to deal with the new risks and additional complexities.

^{Table 1} provides the main recommendations to enhance the supervision of the banking activities conducted in Ireland with a direct bearing on its financial stability. These recommendations are focused on LSI supervision.

^{Table 1.}

Ireland: Main Recommendations¹

¹In terms of priorities, H, M, and L stand for high, medium and low. In terms of time frame, I, ST, and MT stand for immediate (within one year), short-term (within 1–3 years), and medium-term (within 3–5 years).

^{Table 1.}

Ireland: Main Recommendations¹

#	Recommendations	Addressee	Priority	Timeframe
	Organization of supervision
1.	Amend the Central Bank Act or other appropriate legislation such that the Minister of Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶ 31).	DoF, Oireachtas	M	ST
2.	Enshrine in legislation a written procedure for the submission by the Central Bank and approval by MFIN of the supervisory levy. (¶ 33).	DoF, Oireachtas	M	ST
3.	Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶ 34).	Central Bank	M	ST
4.	Continue adapting supervisory capacity and tightening supervisory cooperation to reflect increasingly complex business and operational models of international LSIs, seeking to maintain consistency in supervisory approaches and techniques across international SIs and LSIs, with due regard to the nature, scale, and complexity of specific banks (¶ 36).	Central Bank	M	MT
5.	Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶ 39).	DoF, Oireachtas, Central Bank	H	MT
6.	Expand collaboration across conduct, consumer protection, and prudential supervision, to unleash the full potential of supervisory functions integrated under the 'One Bank' approach, while adjusting the underlying cooperation arrangements and operational processes (¶ 49).	Central Bank	M	ST
	Supervisory Approach, Tools
7.	Intensify ongoing efforts to implement the report on “Behavior and Culture in Irish Retail Banks” in systematic supervision of individual banks, and by connecting findings with prudential supervision outcomes on an individual bank level (¶ 69).	Central Bank	M	ST
	Credit Risk
8.	Perform dedicated reviews of banks' approaches to the calculation of expected credit losses, reflecting on findings from the COVID-19 pandemic crisis as well as broader experience since the implementation of the IFRS 9 (¶ 76).	Central Bank	H	ST
9.	Maintain the use of tools developed for intensified supervision during the COVID-19 pandemic crisis, where practical and appropriate, including the monitoring tools to identify latent credit risk and to ensure accuracy of banks' credit reviews and credit risk indicators (¶ 78).	Central Bank	H	ST
10.	Maintain the supervisory focus on banks' processes ensuring consistency, comparability, and the independence of valuations of residential real estate properties (¶ 81).	Central Bank	M	MT
	Climate Risk
11.	Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level, respecting the independent mandate of the Central Bank (¶ 114).	Government, Central Bank, DoF	H	I
12.	Adopt a sequenced action plan to manage climate-related financial risks in priority areas. Put the emphasis on robust data and quality disclosure in the early stages (¶ 117).	Central Bank	H	I

¹In terms of priorities, H, M, and L stand for high, medium and low. In terms of time frame, I, ST, and MT stand for immediate (within one year), short-term (within 1–3 years), and medium-term (within 3–5 years).

View Table

^{Table 1.}

Ireland: Main Recommendations¹

#	Recommendations	Addressee	Priority	Timeframe
	Organization of supervision
1.	Amend the Central Bank Act or other appropriate legislation such that the Minister of Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶ 31).	DoF, Oireachtas	M	ST
2.	Enshrine in legislation a written procedure for the submission by the Central Bank and approval by MFIN of the supervisory levy. (¶ 33).	DoF, Oireachtas	M	ST
3.	Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶ 34).	Central Bank	M	ST
4.	Continue adapting supervisory capacity and tightening supervisory cooperation to reflect increasingly complex business and operational models of international LSIs, seeking to maintain consistency in supervisory approaches and techniques across international SIs and LSIs, with due regard to the nature, scale, and complexity of specific banks (¶ 36).	Central Bank	M	MT
5.	Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶ 39).	DoF, Oireachtas, Central Bank	H	MT
6.	Expand collaboration across conduct, consumer protection, and prudential supervision, to unleash the full potential of supervisory functions integrated under the 'One Bank' approach, while adjusting the underlying cooperation arrangements and operational processes (¶ 49).	Central Bank	M	ST
	Supervisory Approach, Tools
7.	Intensify ongoing efforts to implement the report on “Behavior and Culture in Irish Retail Banks” in systematic supervision of individual banks, and by connecting findings with prudential supervision outcomes on an individual bank level (¶ 69).	Central Bank	M	ST
	Credit Risk
8.	Perform dedicated reviews of banks' approaches to the calculation of expected credit losses, reflecting on findings from the COVID-19 pandemic crisis as well as broader experience since the implementation of the IFRS 9 (¶ 76).	Central Bank	H	ST
9.	Maintain the use of tools developed for intensified supervision during the COVID-19 pandemic crisis, where practical and appropriate, including the monitoring tools to identify latent credit risk and to ensure accuracy of banks' credit reviews and credit risk indicators (¶ 78).	Central Bank	H	ST
10.	Maintain the supervisory focus on banks' processes ensuring consistency, comparability, and the independence of valuations of residential real estate properties (¶ 81).	Central Bank	M	MT
	Climate Risk
11.	Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level, respecting the independent mandate of the Central Bank (¶ 114).	Government, Central Bank, DoF	H	I
12.	Adopt a sequenced action plan to manage climate-related financial risks in priority areas. Put the emphasis on robust data and quality disclosure in the early stages (¶ 117).	Central Bank	H	I

¹In terms of priorities, H, M, and L stand for high, medium and low. In terms of time frame, I, ST, and MT stand for immediate (within one year), short-term (within 1–3 years), and medium-term (within 3–5 years).