Lessons have been learned in the euro zone about how to deal with banks that are failing or likely to fail, the deputy governor of the Central Bank of Ireland Cyril Roux has told the Oireachtas Banking Inquiry.
Mr Roux said a new pan-European policy approach has been adopted that has entailed another change in the regulatory framework through the Bank Recovery and Resolution Directive (BRRD).
“BRRD represents a significant change in approach to the resolution of failing banks, with the creation of large new resolution funds pre-funded by industry, and with the introduction of a bail-in tool allowing unsecured liabilities to be ‘bailed-in’ in times of difficulty to recapitalise a bank and avoid recourse to taxpayer-funded bail-outs,” Mr Roux explained.
“The BRRD is in the process of being transposed into Irish law through a ministerial regulation. This new European resolution regime will be bolstered in the context of Eurozone countries with the creation of the Single Resolution Mechanism (SRM), and the establishment of a Single Resolution Board (SRB) based in Brussels.”
He said the SRM system applies to the largest euro zone banks, and involves the mutualisation of the resolution funds of participating countries and the taking of resolution decisions in respect of failing banks by the SRB.
The BRRD and the SRM aim to create a “predictable framework” for resolving European banks that may fail in the future, Mr Roux added.
"The BRRD provides a toolkit for resolving failing banks without recourse to taxpayer support," he said. "The Central Bank, as the designated national resolution authority, is already working with the banks to remove barriers to resolvability and developing resolution plans in line with the BRRD requirements."
Mr Roux also explained the new system of supervision of euro zone banks that has been in place since the end of October 2014, with the establishment of the Single Supervisory Mechanism (SSM) under the umbrella of the European Central Bank.
“The ECB directly supervises the so-called ‘significant institutions’ with the assistance of national competent authorities of participating member states, such as the Central Bank,” he said.
Mr Roux said daily supervision of the larger banks is conducted by joint supervisory teams, mostly made of Central Bank staff, but always headed by an ECB co-ordinator based in Frankfurt.
“These co-ordinators propose draft decisions to the supervisory board of the ECB. When approved, these draft decisions are submitted to the governing council and finally signed by the president of the ECB,” he said.
He said the guiding principle of assertive, risk-based supervision “drives” the SSM, as it has driven the Central Bank since the beginning of the decade.
Mr Roux also outlined how banking supervision within the Central Bank was reorganised and strengthened in 2014. “Approved headcount was increased from 110 to 140, to reduce, albeit partially, the gap with the euro zone average,” he said.
“Instead of two generalist divisions, we now have three: one is dedicated to ongoing supervision, one to specialist expertise, and a wholly new third division carries out onsite inspections year-round.
This structure better aligns the Central Bank with the organisational requirements of the SSM and further enhances our supervision.”
Mr Roux was appointed to the position of deputy governor in charge of financial regulation of the Central Bank on October 1st 2013.
When asked if the financial regulation division within the Central Bank was now properly resourced, Mr Roux told Fianna Fail’s Michael McGrath that there is a 10 per cent vacancy rate in its banking supervision unit. Some 124 of the 140 positions in the division are currently filled, he added.
He said the main problem for the regulator was the issue of experience of its supervisory staff. He noted that in France, staff could stay for between 15 and 25 years but in Ireland staff are "coming and going".
Mr Roux said they either get promoted within the Central Bank or they leave the regulator for more lucrative work elsewhere.
He said four to six staff now regulate each of Ireland’s ‘significant’
financial institutions - AIB, Bank of Ireland, Permanent TSB and Ulster Bank.
The committee had previously heard from other witnesses that just three staff would regulate two banks in the years before the financial crash in late 2008.
Mr Roux detailed five fines totalling €5.44 million that have been issued against banks based in Ireland since he took office 21 months ago. In 2013, AIB agreed a settlement of €490,000 while Citibank Europe paid a fine of €500,000.
In 2014, Ulster Bank was fined €3.5 million for IT failures that resulted in about 600,000 customers being locked out of their accounts. In addition, UniCredit Bank Ireland plc agreed a settlement of €300,000 while Bank of Montreal Ireland plc was fined €650,000.
