Comments by Director of Policy and Risk, Gerry Cross, at the Ernst & Young Non-Executive Director Breakfast Forum 28 April 2016 Speech This is an overview of comments by the Director of Policy and Risk, Gerry Cross speaking at an E&Y NED Forum on 28 April. His comments surveyed the current regulatory environment and some cross cutting current themes for the Central Bank of Ireland. We are in the late phase of the post-crisis regulatory reform period. This reform has made banks more secure, interconnectedness of the financial system is better understood and managed, measures have been taken to ensure that tax payers don’t bear the cost of a future crisis, and (while less advanced) progress has been made with oversight of ‘shadow-banking’. We are now in a period when there is significant attention on renewed growth, employment and investment, which is not irrelevant to the regulatory context. The EU’s programme for a Capital Markets Union is an example of this with its focus on alternative sources of funding (such as crowd-funding), insolvency law reform, cross-border investment funds, and prospectus directive initiatives. In this context I would draw your attention to the first Capital Markets Union status report [1]. A second feature of the current phase is looking back at the reforms and changes to regulation and asking: what is the cumulative impact, what are the interactions between different measures, and can those measures be improved? The European Commission's recent Call for Evidence [2] is situated in this dynamic. I believe that we are now more or less in the right place. Measures taken have resulted in a more resilient system, and have not overshot. While it is desirable and necessary to continue to study the impact and effects and be attentive to unintended consequences, I think that any changes at this stage should be minor adjustments and corrections rather than anything more. Other voices, such as those of Adair Turner and Martin Wolf, argue that banks' role in money creation mean that significantly more regulatory reform is necessary. It is fair to note however, that a danger of over- or ill-designed regulation could be a risk of homogeneity amongst firms which should be guarded against. There is a debate in prudential policy circles on simplification and comparability versus risk sensitivity. This discussion weighs the argument that reliance on firms' internal models results in undue complexity and lack of comparability versus the view that standardised approaches must err on the side of conservatism and do not promote advances in risk management.[3] I’ll turn now to the area of ‘shadow-banking’ or, less pejoratively, ‘market-based finance’. The Central Bank is well embedded in this area of policy development, given the sector’s significance in the Irish economy. Current issues for regulators include liquidity risks in the funds sector. The Central Bank considers the funds industry in Ireland generally is relatively well-positioned in terms of liquidity risks but that the size of the funds industry (including special purpose vehicles) is large[4]. Looking now at recent developments in supervision, I’ll focus particularly on areas that continue to evolve. Supervision has changed dramatically since the crisis. While the SSM in Frankfurt adopted the Central Bank’s PRISM risk-based supervisory approach, it has modified it and is now applying that modified version back into the Irish "significant" banks (supervised from Frankfurt, with joint supervisory teams with the Central Bank). The Central Bank is reviewing the changes the SSM has made for updating our own system. Central Bank and European Supervision now includes greater physical presence on the ground by the supervisory teams, heightened demands of Boards and Senior Management, and many other enhancements. There is always room for improvement in respect of governance practices in industry. Recently the Central Bank fined Arch Reinsurance Europe Underwriting for breaches of the Corporate Governance Code [5]. Culture and risk appetite are other areas where the Central Bank is continuing to advance its thinking and focus. I’d also draw your attention to recent developments in guidance for Fund Management Companies in Ireland. These includes developments around the issue of Directors' time commitment (and the Central Bank’s basic parameter of 2,000 work hours in a year and guidance as to the number of directorships) and oversight of delegated tasks (while the task might be outsourced, responsibility cannot). In 2014 the Central Bank issued a consultation on Fund Management Company Effectiveness - Delegate Oversight, the feedback was published on our website [6]. Guidance on oversight was prepared in consultation with industry experts and it is an important and useful piece of work that had been completed with the assistance of a Group of Experts. The Central Bank’s guidance aims to be practical and has regard to the way that the funds management industry in Ireland is structured (including the significant players involved, outside Ireland). In conclusion I’d like to talk briefly about other risks. The risk of Brexit is a material one that must be taken account and planned for by Irish institutions. Optimism is not a substitute for good risk planning. The Central Bank has concerns about, and a current focus on IT and cyber risks. IT issues are, generally, not well governed at board level. We will be publishing a document on the topic in the coming period. It will look for improvements across a range of aspects including in the level of board engagement in technology and cyber risk issues. Finally, there is currently a focus on corporate culture and the role of culture in risk management. He referred to the innovative work of the Dutch Central Bank as one example of the focus on advances in this area. ------------------------------------------------- [1] Capital Markets Union Status Report (European Commission, 25 April 2016). [2] Call for Evidence on the EU Framework for Financial Services (European Commission, 30 September 2015). [3] Basel Committee proposes measures to reduce the variation in credit risk-weighted assets (Bank for International Settlements, 24 March 2016). [4] Global Shadow Banking Monitoring Report 2015 (Financial Stability Board, 12 November 2015). [5] Settlement Agreement between the Central Bank of Ireland and Arch Reinsurance Europe Underwriting (Central Bank of Ireland, 16 March 2016). [6]Consultation on Fund Management Company Effectiveness - Delegate Oversight and Related Documents (Central Bank of Ireland, September 2014).