5.2 This section considers first, the resources devoted to micro-prudential supervision and the growth in the number and asset base of regulated credit institutions and second, how these resources were allocated among institutions.
- Resources devoted to micro-prudential supervision
5.3 There was a gradual increase in the number of positions approved for the Banking Supervision Department (BSD), from 38.5 posts in 2000 to 56.5 in 2008, with a parallel increase in the number of persons actually employed over the same period (Table 5.1).
The vacancy rate, although it fluctuated, rarely fell below 9 per cent; in only one year (2002) were there no vacancies.
Table 5.1 Banking Supervision Department, Resources, Number of Persons,
Source: Based on annual BSD organisational charts
a Defined as Vacancy/Approved
5.4 While Prudential Supervision accounts for an increasing share of overall resource allocation within the FR over the period 2004-08, the proportion allocated to Banking Supervision declines somewhat from 15 per cent to 13 per cent (Table 5.2); this reflects the stronger growth of prudential resources applied to other responsibilities such as insurance (which had just been transferred from the Department of Enterprise Trade &
Employment) and reinsurance (as it was made subject to regulation for the first time).
Moreover, within BSD, key staff were diverted into activities such as the implementation in Ireland of the many new and technically demanding international requirements introduced over the period and participation in various EU and ECB groups. For example, from 2005 five persons, or 11 per cent of BSD resources, needed to be reallocated to deal with the implementation of Basel II and EU affairs.74,75 In addition there was a significant retraining burden on all BSD staff arising from the introduction of the CRD and work on the development of ―Pillar I‖ approaches in relation to each credit institution. This had an impact on all of the department‘s work.
74 This factor was also cited in the FSA (2008, pp. 2-3) examination of the failure of regulatory supervision in Northern Rock.
75 Based on the BSD organisational chart for 2005. There were two vacancies.
Table 5.2: Financial Regulator, Prudential Supervision and Banking Supervision Department Resources, Number of Persons, Actual, 2004-2008
Year Financial Regulator
Source: Based on annual BSD organisational charts
5.5 Apart from volume issues, there were concerns about the skill mix of BSD resources.
The supervision teams were led by middle management and lacked some of the specialised expertise needed. Indeed a diversity of different technical skills and disciplines is involved. Where it existed, this skills gap will have reinforced the tendency to diffidence in engaging with the regulated entities. Inspections generally involved substantial contact with senior management of the regulated entity, who had access to a wide range of specialist experts. There were difficulties recruiting and retaining persons with the required expertise, mainly reflecting salary competition in the market and the constraints on what the FR could offer in terms of salary.
- The scale of the credit institutions sector
5.6 The total number of credit institutions subject to regulation by BSD remained largely unchanged, from 80 in 2003 to 82 in 2008 (Table 5.3). In contrast, total assets rose threefold between 2003 and 2008 suggesting some increase in the need for regulation.
Table 5.3: Regulated Credit Institutions, Number and Total Assets, 2000-2008
Year Total numbera Total assetsb (€ million)
a The number of credit institutions refers to end-year.
b Assets refer to end-year aggregate balance sheet data, covering resident offices of credit institutions operating in Ireland. Resident offices refer to offices or branches in Ireland. This excludes, for instance, branches or subsidiaries (e.g., AIB branches or subsidiaries outside of the Republic of Ireland). Total assets are presented in nominal terms.
- Allocation of supervision resources
5.7 BSD had to make choices as to how to assign responsibility for the 80 or so institutions within its remit, especially in view of the increasing need in the face of relatively static resources. BSD resources were concentrated on the domestic Irish institutions. For example, in 2005:
a three person team was responsible for Bank of Ireland and Anglo Irish Bank;
a two person team76 was responsible for the AIB group and Irish Life and Permanent (IL&P);
a three person team77 was responsible for eight credit institutions and a branch, including INBS and EBS; and,
a three person team was responsible for nine credit institutions and two branches, which included Ulster Bank.
To these resources need to be added those made available by a team of four persons that conducted prudential inspections across several institutions.78
5.8 In May 2005 the FR adopted a formal risk-based framework whereby ―a single cohesive approach across all sectors of activity is applied‖79. The system evaluated risk using such factors as supervisory complexity, corporate governance, business and reputational risk and so on, based on regular statistical reports provided by credit institutions on their activities and financial condition.80 The risk-based framework was used to draw up a schedule of on-site inspections. It concluded that a small number of rather large institutions should be inspected on-site once a year, with a one-every-two-years schedule for the next tier of institutions and the remainder to be inspected on a longer rotation depending on available resources.
5.9 It is generally felt now that the total number of supervisory staff allocated to the supervision of the 80-odd credit institutions was inadequate. To be sure, the regulatory approach being adopted was not an intrusive one, and as such need not call for a lot of resources.
76 It should have been three but there was a vacancy.
77 It should have been four but there was a vacancy.
78 Prior to 2005 these inspections were conducted by the team assigned to a particular credit institution, but from 2005 this function was performed by a separate team, but relying, of course, on the instructions of the team responsible for the day-to-day supervision of the credit institution.
79 FR (2006g, p. 67).
80 For details see ibid., p. 67. Successive reports of the C&AG (1999, 2007, 2009) have urged improvements in this methodology. Mazars (2009, p. 67) noted that the risk model was in place for the purposes of prudential supervision.
5.10 It should be noted that bank supervisors are required to carry out numerous detailed approval functions, for example, vetting proposed subordinate debt issues to ensure that they comply with the criteria to qualify them as capital instruments. This is an important prudential function, but it doesn‘t help identify ongoing risks in the operations of the banks.81
5.11 Indeed, a simple international comparison presented by the UK FSA in their 2006 Annual Report and reproduced by the C&AG in their 2007 report suggested that the resources devoted to regulation in Ireland may have been, if anything, above some larger EU countries albeit below some non-EU jurisdictions.82,83 However, there are significant economies of scale involved in regulation, bearing in mind the considerable amount of policy development and regulatory design work that was under way, much of it related to introduction and application of the highly complex CRD procedure for determining the minimum required capital for a bank (this work is needed no matter how few banks there are). So a small economy will tend to have a disproportionately high regulatory cost, especially if the regulatory task includes (as it does in Ireland) a large financial services export business entailing the regulation of some 15,000 entities of all types.
5.12 Overall in 2009, the ratio of employment in the FR to employment in the financial intermediation sector in Ireland was compared to several other EU countries and Australia with the conclusion that, ―[O]verall, the Financial Regulator would appear to be broadly in line with the comparator countries in terms of resources at its disposal.‖84 5.13 The way in which resources were deployed may have led to an under-resourcing of the
micro-prudential banking function. The FR was somewhat different from other financial regulators given its role in promoting the Irish financial services sector.
Mazars (2009, p. 48) observes that the FR in Ireland devotes considerable resources to:
81 Another task is vetting banks‘ internal risk models with a view to having them approved for the purpose of calculating CRD minimum capital requirements. Such approval would entitle regulated firms to operate with less of a capital buffer and as such was prized by such firms.
82Thus, in 2005, the resource costs devoted to regulation (per € million of assets valuation) was €14 in Ireland compared with: France, €13; Germany, €7, and the UK, €10. This compares with much higher numbers for: Hong Kong, €26, Singapore, €28, and the US, €177. (Based on C&AG, 2007, Table 6.4, p.
65).
83 In a subsequent study, that considers all financial service providers rather than just banks and building societies, for similar sized countries, Ireland is about average for the ratio of financial regulator employees to financial service sector employees. On another indicator – cost per billion of assets regulated as compared to the international average Ireland was below the average. The study used 16 peer regulators, but no data is revealed about individual regulators. For details see Mazars (2009, p. 45).
84 EIU (2009, p. 86). Other comparative indicators were also used in coming to this conclusion.
―Meet and greet‖ activities for new or prospective regulated entities85,86;
Advice to accountants, legal firms and other professional advisors;
Participation in external committees/groups; and,
Responding to requests for information from third parties.
Mazars also draws attention in this context to ―the specific mandate of the Financial Regulator under High Level Goal 4 ‗We will facilitate innovation and competitiveness‘ which is not as apparent elsewhere‖, which was introduced in the Strategic Plan for 2007-2009 (FR, 2006b, p. 26). Qualitatively, therefore, there was a drain impossible to quantify in the direction of ancillary activities which was more marked than in other comparable institutions reflecting the broader mandate of the CB and FR.87
5.14 The financial crisis has made it clear, though, both in Ireland and elsewhere, that effective bank supervision simply cannot be performed with the thin staffing that was applied to frontline operations of the FR.88