Central Bank to tighten rules on special purpose vehicles

The Central Bank said on Thursday it would roll out stricter reporting requirements “within months” for certain types of financial companies, after concerns from within the bank they could pose a threat to financial stability.

A report last month from a team of Central Bank economists raised serious concerns about the lack of information about the activities of Irish-registered special purpose vehicles (SPVs) holding billions of euros of assets.

SPVs are single-activity financial companies set up by global financial institutions specifically to keep assets off their balance sheets, often to ensure the SPV’s bankruptcy does not rebound on the parent company.

Charities

The originators of an SPV can often be difficult to identify, as their shares are usually held in trust by charities proposed by Irish law firms.

The report identified the lack of information about who is behind such companies as a problem in identifying risk.

SPVs often deal in risky assets such as highly complex debt derivatives, carbon offsets or “catastrophe bonds” based on weather events.

They are similar to financial vehicle corporations (FVCs), companies that act as securitisation vehicles and are obliged to give detailed reports to the Central Bank on their linkages to the banking system. The bank plans to extend these same reporting requirements to SPVs, which its economists said usually sit “on or outside the regulatory perimeter” and are less intensively regulated than banks, despite their size.

The report, by bank economists Brian Godfrey, Neill Killeen and Kitty Moloney, said the light-touch regulation of SPVs could "potentially exacerbate the vulnerabilities within the financial system".

“The global financial crisis highlighted the need to better understand the activities of entities within the financial system,” they wrote.

The economists concluded that due to the relatively limited data on SPVs and FCVs held by regulators, “it is difficult to assess fully the financial stability implications of activities within the sector”.

Risks

“Some of the characteristics of Irish FVCs and SPVs could potentially pose risks to international financial stability owing to their activities, their international linkages and the limited oversight of the sector,” the report concluded.

The report estimated about 1,300 such companies were registered in Ireland in 2012.

Due to its regulatory and taxation system, Ireland has become an international hotspot for SPVs. The country is heavily marketed abroad by Irish law firms as a destination for global banks and hedge funds to house assets they want to keep off balance sheets.

SPVs tend not to have operations in this country and have no other direct economic links to Ireland. They are often structured in such a way that they do not make any profits, and so pay little, if any, tax.

The biggest beneficiaries in the domestic economy from the influx of SPVs tend to be Irish-based professional services firms that arrange and administer the companies, and charities often take fees for holding shares in trust.