I am informed by the Central Bank that when a licence application is received, it is reviewed from a number of different perspectives. These include micro- and macro-prudential based assessments as well as reviews under the conduct of business and consumer protection codes. In assessing the macro-prudential risks of a banking licence application, the Central Bank examines the potential systemic risk of the applicant on the domestic financial system.
This assessment includes a review of the bank's business model which includes an assessment of the size of the firm, the likely interconnectedness with other financial institutions and the level of interaction with the private non-financial sectors. Consideration is also given to the potential reputation risks to the Irish financial system by the such applicants.
As a member of the Single Supervisory Mechanism (SSM), decisions relating to the granting of licences to significant institutions are made in conjunction with the European Central Bank (ECB). When the assessment of the formal application has been completed, the Central Bank will determine whether to recommend to the ECB that authorisation be granted.
A decision will then be made by the ECB on whether to grant a banking licence. A banking licence will only be granted where the ECB and the Central Bank are satisfied that the applicant complies with all of the authorisation requirements.
In addition to licence applications, the Central Bank reviews the potential systemic risk from financial institutions on an annual basis. The objective of the Other Systemically Important Institutions (O-SII) buffer is to reduce the potential impact of a systemically important financial institution’s failure on the domestic economy.
The Central Bank, together with the ECB, is responsible for identifying O-SIIs for Ireland and setting buffer rates. The 2018 assessment was published in November. Six institutions have been identified as systemically important in Ireland and buffer rates have been applied to these institutions. The rates, ranging from 0% -1.5% per cent of risk-weighted assets are to be introduced on phased basis over the period July 2019 to July 2021.
Since the UK voted to leave the EU on 23 June 2016, there has been a notable uplift in the number of firms seeking authorisation from the Central Bank. I am informed that this has included a number of firms operating business models in the capital markets and investment banking space that are new to Ireland.
As these new firms are authorised, the Central Bank will be responsible for the supervision of new risks, including market conduct risk and wholesale credit risk. Though the impact on the Irish domestic economy may be limited, the impact that these firms will have on a pan-European scale may be much greater.
In preparation for the ongoing supervision of these firms, the Central Bank has recently established a new division, the Investment Banks and Broker Dealers Division. A number of these new firms will fall within the SSM supervision model and over the coming months these firms can expect a high level of intrusive engagement both from the Central Bank and SSM.
The Central Bank will seek to ensure that these firms stand up their operations as agreed with the Central Bank, put in place strong and robust risk management processes and demonstrate their independence from any group or parent company in another jurisdiction.