Companies in the Republic’s €4 trillion funds sector have warned the Central Bank that any move to over-regulate the industry could be counterproductive, if it prompted a shift of financial assets into unregulated vehicles.
The comments formed part of responses from funds industry participants to a Central Bank discussion paper as it continues to engage with international authorities on beefing up the resilience of nonbank financial institutions.
Ireland’s large international funds sector makes it one of the largest nonbank financial intermediation – or so-called shadow banking – hubs in the world.
“Some respondents mentioned the potential for unintended consequences from over-regulating the sector, in particular if assets were to move to unregulated vehicles giving regulators less oversight and control,” the Central Bank said in a 25-page feedback statement, published on Tuesday, following industry responses to the discussion paper.
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Respondents generally agreed with the Central Bank’s view that investment funds are different from banks and given the diverse nature of the funds sector, a “one-size-fit-all” approach would not be optimal when considering macroprudential policy for this sector, it said.
“For example, bank-like capital requirements are not appropriate for the nature of the systemic risk posed by fund cohorts,” it said. “The framework should be bespoke to the nature of the systemic risk from [different] fund cohorts.”
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While the current funds regulatory regime has been primarily designed from an investor protection perspective, the Central Bank is of the view that there is a need for a so-called macroprudential framework the improve the resilience of the sector to shocks.
“There is a need to build the architecture for a resilient NBFI [nonbank financial institution] sector, so that, when shocks hit, it can withstand these rather than amplify and transmit them to the rest of the financial system and real economy,” it said.
The bank said it will use the feedback as it contributes to the international policy agenda on nonbank financial activities being co-ordinated by the likes of the Financial Stability Board, the International Organization of Securities Commissions and the European Commission.
The Central Bank has introduced macroprudential rules for two segments of the funds sector in recent years.
It introduced a plan in 2022 to limit leverage – or borrowings – of property funds to 60 per cent of the value of underlying assets, giving pre-existing funds five years to comply. The measures are designed to ensure that investment funds are better able to deal with downturns in the commercial property market.
Three months ago, it moved with Luxembourg authorities to bolster the resilience of a type of UK fund – known as liability-driven investment funds – that ran into trouble in September 2022 and threatened the State’s pensions sector.
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