While both industry and the Financial Regulator want strong players in the IFSC, it can never be a zero-failure environment, writes James Deeny
The recent coverage of the problems associated with the Irish subsidiary of Sachsen LB and the associated implied criticism of the Irish regulatory regime have failed to cover some crucial aspects of international regulation in Ireland.
Fundamental lessons were learned from the Bank of Credit and Commerce International (BCCI) fiasco nearly 20 years ago when that bank structured itself in such a way that there was no obvious primary regulator.
International financial regulation now clearly defines where the buck stops through a universal principle of home country consolidated regulation of the worldwide operations of a banking group. In the case of Sachsen this consolidated supervision occurs within the German regulatory system.
To say that the Irish Financial Regulator was seeking to distance itself from the problem is totally unfounded. It was for the Financial Regulator here to supervise the compliance with national and European banking regulation of the Irish subsidiary Sachsen LB Europe solely and that is what it did.
There are obvious lessons to be learned from the Sachsen situation, both in Ireland and, more particularly, in Germany. The German regulatory system is fragmented and does not benefit from a single regulatory regime similar to that established in Ireland in 2003. One can legitimately ask whether it was prudent to allow a regional savings bank to engage in capital market operations on the scale involved and whether such a bank had the necessary experience and controls in place to engage in such activity. That was for the German regulator to decide.
Now, we can expect the bar will be raised both in Germany and in Ireland regarding the scrutiny of bank licence applications and their associated business cases, especially with smaller banks involved in capital market transactions.
However, the system of home country regulation that was put in place has worked and the problems that arose have been addressed and resolved in Germany.
We also need to bury another dangerous media misconception that Ireland operates a "light touch" regulatory regime. This is a million miles from the reality. The fact is that the Irish Financial Regulator operates to world-class regulatory standards where increasingly its day-to-day regulatory work is driven by EU and international regulation.
I would seriously doubt whether any of the over 10,000 firms and funds regulated by the Irish Financial Regulator would categorise their regulation as "light touch".
The Financial Services Consultative Industry Panel continually talks to the Financial Regulator, seeking to achieve a top quartile standard in financial regulation, balanced with international competitiveness. Light regulation is on neither of our agendas.
The use by some media commentators of easy catchphrases to help describe the complex matters that have arisen equally have no place in a serious debate on these issues. They only add to the potential misunderstanding that can arise and, indeed, can also lead to unnecessary reputational damage internationally.
Since its formation in 2003 the Financial Regulator has undertaken an immense workload in completely updating its authorisation, fitness and probity, sanctions and inspection protocols. It has significantly raised the bar for all domestic and international financial service providers. The reality is that it is doing a good job.
In the international wholesale financial services market, Ireland ranks in the top four in the EU. Ireland punches well above its weight in the sector, with a highly developed skill set across a range of financial services.
In the main, the players involved are strong international financial names operating under a robust Irish regulatory regime. The sector is a huge job creator and wealth generator for Ireland.
The IFSC is a financial crossroads and given the scale of the operations involved, we can expect at the margin that similar situations to Sachsen will arise where weaker players run into difficulty.
We need a mature understanding of this. As the saying goes when the tide goes out you find out who is in the water without a swimsuit and this unfortunately has been the case with Sachsen.
Fundamentally there is no difference between industry and the Financial Regulator in wanting strong players in the IFSC; however, it can never be a zero-failure environment.
James Deeny is chairman of the Financial Services Consultative Industry Panel which, under the Central Bank and Financial Services Act, provides independent input to the Financial Regulator on new regulation.