## 1irlea2022006 — Executive Summary and Key Findings ## Source details **Canonical URL:** [1irlea2022006 — Executive Summary and Key Findings](https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1irlea2022006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1irlea2022006.pdf.json) --- ### Key findings - Supervision of less significant institutions (LSIs) is largely effective in Ireland. The Central Bank’s supervisory approach to LSIs is intrusive and well-developed supervisory tools are appropriately applied. - The supervision leverages its membership in the Single Supervisory Mechanism (SSM) to enhance capacity of tools and approaches. - Supervision has sufficient rigor, although some gaps in the enforcement framework remain to be covered by the legislative changes planned for 2022. - Supervisory responses to changing conditions are timely and agile. The expertise of supervisors is expanding with market development, although keeping up its pace can be a challenge. - The independence of banking supervision is strong in practice and benefits from the safeguards of the SSM. Recent efforts to enhance cooperation between prudential and conduct supervision under the Central Bank’s “One Bank” approach have raised supervisory quality, with scope for further enhancements. - Prudential regulation of banks has improved greatly since the 2016 FSAP. The EU framework has largely embraced international regulatory reforms and responded to legacy NPL issues. - The Irish Government provided extraordinary financial support to individuals and businesses in reaction to the pandemic crisis; Irish and EU legislators introduced regulatory flexibility while maintaining steering principles and not slipping to regulatory forbearance. - The Central Bank applies the entire SSM regulations to its LSIs, providing a strong supervisory framework consistent and proportionate compared to that applied to Significant Institutions (SIs). - The banking supervision has been tested by major shocks—Brexit and the COVID-19 pandemic—with outcomes still unfolding. Climate risk is an emerging, growing challenge across supervisory dossiers. ### Areas requiring continued supervisory focus - Mitigation/management of the impact of the COVID-19 pandemic: - Banking supervision will need to follow up on latent credit risk with sufficient intrusiveness to ensure that all relevant indicators measuring credit risks are accurately calibrated, while monitoring capital and liquidity positions with increased intensity. - Transformation of business and operational models in retail banking services: - Requires consistent rigor in application of existing core approaches (embedded in the supervisory review process), supplementary tools, and conceptual changes in frameworks to assure consistent and proportionate regulatory and supervisory approaches across institutions. - Continuous upgrades in supervision of international/investment banking: - Supervision must upgrade capacity in response to growing size and complexity of international banking businesses, factoring in cooperation benefits within the SSM and outside the EA. - Constitution of climate-related financial risks supervision: - The increasing importance of climate-related risks will require a robust supervisory approach to manage new risks and additional complexities. ### Context and scope - The Irish banking system has experienced significant changes reflecting issues of business model sustainability in retail banking and absorbing the impact of Brexit. - Profitability of retail banks is impacted by the low interest rate environment and concentrated interest-income streams. - International banks from outside the EU find Ireland an attractive location to establish operations for the EU-27. - The process of business-model transformation will require time and focused supervisory attention and may be accompanied by further market concentration. - The EU regulatory framework has strengthened dramatically since the 2016 FSAP, including with implementation of Basel III, although some additional steps remain. - This Technical Note was prepared by David Lukáš Rozumek, Monetary and Capital Markets Department, in the context of the 2022 Ireland Financial Sector Assessment Program. - Scope: The note primarily focuses on the Central Bank’s supervision of Irish LSIs within the broader EU regulatory environment and uses selected Basel Core Principles (BCP) as a guiding structure. The mission selected CP2, CP3, CP5, CP8, CP9, CP13, CP14, CP15, CP17, CP18, CP19, CP20, CP22, and CP26 to structure discussions. ### Main recommendations (organized by theme; priority and timeframe preserved) Organization of supervision - 1. Amend the Central Bank Act or other appropriate legislation such that the Minister of Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶ 31). - Addressee: DoF, Oireachtas - Priority: M - Timeframe: ST - 2. Enshrine in legislation a written procedure for the submission by the Central Bank and approval by MFIN of the supervisory levy. (¶ 33). - Addressee: DoF, Oireachtas - Priority: M - Timeframe: ST - 3. Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶ 34). - Addressee: Central Bank - Priority: M - Timeframe: ST - 4. Continue adapting supervisory capacity and tightening supervisory cooperation to reflect increasingly complex business and operational models of international LSIs, seeking to maintain consistency in supervisory approaches and techniques across international SIs and LSIs, with due regard to the nature, scale, and complexity of specific banks (¶ 36). - Addressee: Central Bank - Priority: M - Timeframe: MT - 5. Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶ 39). - Addressee: DoF, Oireachtas, Central Bank - Priority: H - Timeframe: MT - 6. Expand collaboration across conduct, consumer protection, and prudential supervision, to unleash the full potential of supervisory functions integrated under the ‘One Bank’ approach, while adjusting the underlying cooperation arrangements and operational processes (¶ 49). - Addressee: Central Bank - Priority: M - Timeframe: ST Supervisory Approach, Tools - 7. Intensify ongoing efforts to implement the report on “Behavior and Culture in Irish Retail Banks” in systematic supervision of individual banks, and by connecting findings with prudential supervision outcomes on an individual bank level (¶ 69). - Addressee: Central Bank - Priority: M - Timeframe: ST Credit Risk - 8. Perform dedicated reviews of banks’ approaches to the calculation of expected credit losses, reflecting on findings from the COVID-19 pandemic crisis as well as broader experience since the implementation of the IFRS 9 (¶ 76). - Addressee: Central Bank - Priority: H - Timeframe: ST - 9. Maintain the use of tools developed for intensified supervision during the COVID-19 pandemic crisis, where practical and appropriate, including the monitoring tools to identify latent credit risk and to ensure accuracy of banks’ credit reviews and credit risk indicators (¶ 78). - Addressee: Central Bank - Priority: H - Timeframe: ST - 10. Maintain the supervisory focus on banks’ processes ensuring consistency, comparability, and the independence of valuations of residential real estate properties (¶ 81). - Addressee: Central Bank - Priority: M - Timeframe: MT Climate Risk - 11. Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level, respecting the independent mandate of the Central Bank (¶ 114). - Addressee: Government, Central Bank, DoF - Priority: H - Timeframe: I - 12. Adopt a sequenced action plan to manage climate-related financial risks in priority areas. Put the emphasis on robust data and quality disclosure in the early stages (¶ 117). - Addressee: Central Bank - Priority: H - Timeframe: I Cross-cutting focus: Brexit, COVID-19 pandemic, and climate risk - Brexit and COVID-19 were identified as "issues of particular concern" at the time of the FSAP. - Brexit effects: - Heightened demands on supervision from new complex institutions moving to Ireland from the United Kingdom (U.K.). - Introduced cross-border issues on supervisory coordination and collaboration for both home and host supervisors. - COVID-19 effects: - Major support measures are being wound down, raising concerns about asset quality as support to households and businesses is unwound. - “Considerable fiscal and supervisory relief has mitigated the impact of the pandemic” but asset quality issues that have/may emerge were examined. - Climate risk: - Explored supervisory approaches to climate risk to provide context for the resilience assessment agreed with the Central Bank and ECB. Market structure — key facts and trends - Sector-wide changes since the 2016 FSAP were partly driven by Brexit. - Aggregate and segmental figures: - Banking sector saw "annual growth of 13 percent in balance sheet size" in 2020. - Retail banks: - Account for "approximately 50 percent of the banking sector". - Comprised of "five retail banks focused largely on the domestic market" with combined assets of "EUR 290 billion in 2020". - Three of these institutions are Irish-owned. - Two retail banks have foreign parents and recently announced their intention to exit from the Irish retail banking sector; their business expected to be largely taken over by domestic Irish-owned banks, increasing concentration. - Retail segment grew by "5 percent in 2020". - Investment banks: - Represent "approximately 40 percent of the banking sector". - Include "three investment banks". - Combined assets of "EUR 250 billion in 2020, compared to EUR 32 billion in 2015". - Other international banks: - Nine banks in this segment, accounting for "approximately 10 percent of the banking sector". - Since 2016, assets in this segment "have dropped by approximately 40 percent, to EUR 65 billion in 2020". - Notes on complexity and internationalization: - Investment banks have "brought a greater concentration of cross border activities" given their international profile and client base. Risks and challenges - Ongoing and emerging risks: - "The remaining impact of Brexit is still unfolding" and "the threat of further deterioration in credit portfolios/latent credit risk following COVID-19 is still present." - From a retail bank perspective, distressed debt remains a feature with downside risks as government support is withdrawn. - Climate risk: - "Climate risk, both physical and transitional, brings heightened risks to bank’s balance sheets." - A cohort of LSIs are "particularly exposed to the transition risk of climate change" with majority having exposures to climate-relevant sectors. - Profitability and business model sustainability: - Retail banks face "low profitability" from high operating costs, less diversified income, low interest rates, and elevated credit-risk costs. - Relatively higher interest rates on lending will reflect these costs and long term "higher risk weighted assets’ (RWA) density of mortgage exposures... caused by high Loss Given Default – LGDs, as well as Probability of Default - PDs". Banking supervision in Ireland — institutional arrangements and priorities - Integration with EU framework: - "Banking supervision in Ireland is integrated into the EU regulatory and supervisory system." - The Central Bank applies the EU/SSM regulation to LSIs and participates actively in SSM and EBA structures. - Common SSM methodologies, processes, and procedures are largely operational in the Central Bank. - ECB oversight of LSI supervision: - The ECB’s role in oversight of LSI supervision "has increased" since 2016. - The Central Bank shares a summary report with the ECB listing key risks to LSIs and supervisory priorities and uses the ECB’s IMAS system to upload risk assessments and carry out the SREP for LSIs. - Increased cooperation with global regulators: - Post-Brexit developments prompted the Central Bank to "promote close cooperation with other European and third country regulators" especially regarding international banks (LSIs). ECB supervisory expectations and NPE provisioning - Guidance to banks on NPLs published in March 2017: the ECB expects banks to set internal coverage thresholds for NPLs, depending on their risk profile. - Addendum to the ECB Guidance published in March 2018: clarifies supervisory expectations for prudential provisioning of new NPEs (exposures classified as non-performing according to the EBA’s definition, from 1 April 2018 onwards). Where banks fell short after a phase-in period the SSM could impose a deduction to CET1 capital under Pillar 2. - Supervisory expectations for provisioning of NPE stock (exposures classified as NPE on 31 March 2018): starting point of "2/7 years vintage buckets for unsecured/secured NPEs", subject to supervisory coverage recommendations and phase-in paths. - The Central Bank chaired the SSM task force and contributed to setting supervisory expectations; the ECB supervisory expectations for provisioning of NPE stock (press release issued on July 11, 2018) was reflected in increased provisions, gradually growing since 2020. - EU CRR Pillar 1 prudential backstop for NPEs: - Statutory prudential treatment under Pillar 1 applies to NPEs arising from loans originated from "April 26, 2019, onwards." - Pillar 1 NPE treatment timelines: - (i) after "three years of NPE status" for unsecured NPEs; - (ii) after "nine years of NPE status" for secured NPEs secured by immovable collateral and residential loans guaranteed by an eligible protection provider; - (iii) after "seven years of NPE status" for other secured NPEs. - The Pillar 1 treatment starts at three years, so the impact will commence only from "2022 onwards." - A quantitative impact of the CRR backstop phase-in on banks has not yet been completed. COVID-19 capital "quick fix" and temporary reliefs - The EU “quick fix” provided temporary reliefs and modified implementation timelines for certain aspects of CRR II, and additional flexibilities such as extended IFRS transitional arrangements. - Examples: - Application of the Global Systemically Important Institutions leverage ratio buffer deferred by one year (until "January 2023"). - Temporary (until "June 27, 2021") and conditional exclusion of certain exposures to central banks from the total exposure measure. - Application of a revised SME factor and infrastructure supporting factor were accelerated (effective on the date of entry into force of the CRR “quick fix”, instead of June 2021). Supervisory independence, governance, and resources - Legal framework gap: legislation provides the Minister for Finance with potential points of influence into the policy making process, including approval of the levy structure to fund supervision and the power to remove Commission members for specified reasons which are broad in nature and interpretation. Amendments are encouraged to strengthen de jure independence. - Central Bank governance: - Commission composition: Governor, two Deputy Governors, the Secretary General of the Department of Finance, and at least six but no more than eight other members appointed by the Minister of Finance. There are currently six appointed members. - Funding and resources: - Central Bank has a stable and continuous source of funding and recovers much of its regulatory costs through the industry funding levy; legislation provides for Ministerial approval of the levy. - Talent and capacity risks: - Brexit has expanded the scale and complexity of risks in Ireland, increasing pressures on Central Bank resources. - The Central Bank has recruited subject matter experts and built horizontal support functions and analytics (PAID). Individual accountability, enforcement powers, and organization of supervision - Individual Accountability Framework (IAF) components identified in the Central Bank’s 2018 report: - Senior Executive Accountability Regime (SEAR); - Enforceable Conduct Standards; - Enhanced Fitness & Probity Regime; - Strengthened Administrative Sanctions Procedure. - Legislative process: - A legislative process has been launched to put in place the individual accountability framework, including enhancements to the administrative sanctions regime; the Central Bank hopes for enactment as soon as possible. - Organization of supervision and “One Bank” approach: - Post-GFC restructuring organized financial regulation under two pillars: Prudential Regulation and Financial Conduct. - The Central Bank has applied a progressive “One Bank” approach in priority planning, multi-year strategy implementation, pooling of technical expertise, enhancing data analytics, and expanding horizontal risk views. - Key recommendation recap: - Recommendation 1: Amend the Central Bank Act to restrict dismissal of Commission members to specified grounds of serious misconduct. - Recommendation 2: Enshrine in legislation a written procedure for supervisory levy submission/approval, setting timing, stakeholder engagement, and transparency expectations. - Recommendation 3: Apply sufficient flexibility on remuneration to recruit and retain appropriate talent. - Recommendation 4: Continue adapting supervisory capacity and cooperation to reflect increasingly complex international LSIs. - Recommendation 5: Amend legislation to provide for greater individual accountability and enhance powers to take direct enforcement action against individuals. One Bank approach: design, benefits, and governance - The “One Bank” approach sharpened understanding during the COVID-19 pandemic, expanded supervisors’ toolboxes, and allowed better targeting of supervisory actions. - Close cooperation between prudential and conduct supervision increased efficiency of supervisory action; examples include ‘Dear CEO distressed debt letters’, the ‘Behavior and Culture’ report, and public speeches. - Keys to success include projecting long-term goals into activities, deep coordination across functions, strong governance, and day-to-day informal cooperation of experts. - Recommendation 6: Expand collaboration across conduct, consumer protection, and prudential supervision to maximize synergies under ‘One Bank’. Supervisory process: SREP and supporting tools - The Central Bank’s supervisory process is forward-looking and mostly concentrated in the Supervisory Review and Evaluation Process (SREP). - Since the 2016 FSAP, the Central Bank adopted the SSM LSI SREP Methodology. - SREP uses qualitative and quantitative inputs including COREP, FINREP, in-house models, ICAAP challenge using an in-house top-down model based on the EBA Stress testing methodology, bottom-up stress tests, and the Liquidity Sensitivity Tool for ILAAP reviews. - SREP outcomes include capital and liquidity requirements and risk mitigation programs (RMPs); more impactful actions include appointment of a 'skilled person' to prepare regulatory reports. - ECB cooperation: - Central Bank must report regularly on LSIs per the SSM’s Notification Framework. - Certain material supervisory procedures or draft decisions must be provided to the SSM ex-ante; annual ex-post information includes SREP decisions and supervisory measures. Business models: assessment methodology and practice - Business model assessments use short-term (one year) and medium-term (three–five years) horizons. - SSM SREP Business Models Assessment phases: - Phase 1: Information gathering and selection of material business areas. - Phase 2: Supervisors look at predefined indicators suggesting a score. - Phase 3: Evidence-based supervisory judgement modifies the score; combines quantitative and qualitative analyses for viability and sustainability assessment. - Central Bank practice: assessments are well structured, comprehensive, and used to influence SREP decisions including Pillar 2 capital requirements. Non-performing loans, legacy issues, and implications for bank sustainability - Actions by the Central Bank and European authorities contributed to a reduction in NPLs from levels above "20 percent" to "5 percent of total loans before the pandemic." - Legacy issues and ongoing issues in foreclosing collateral drive higher credit costs, representing a long-term burden for sustainable business models and financial stability. - Central Bank initiatives on problem loan resolution include Provisioning and collateral valuation guidelines (2011–2012), Mortgage Arrears Resolution Targets (MART) in 2013, Code of Conduct on Mortgage Arrears (CCMA) in 2009, mortgage measures in 2015 limiting LTV and LTI of new lending, MASIG in 2019, and Distressed Debt Working Group (DDWG) in 2020. Supervision of credit risk: monitoring, ECL/IFRS 9, and ongoing tools - Central Bank continuously assesses inherent credit risk of LSIs; retail banks are supervised more intrusively. - COVID-19 responses included enhanced monitoring, monthly submissions via the ‘Distressed Debt Monitoring Template’, and ECB methodological guidance coordinated with the IFRS Foundation emphasizing: - regular assessments of borrowers’ unlikeliness to pay, including exposures with general payment moratoria; - using all relevant information and a risk-based approach rather than relying solely on days past due; - estimating provisions using realistic parameters appropriate for the current environment; - anchoring IFRS 9 baseline scenarios using ECB forecasts in an unbiased manner. - Recommendation 8/9/10 reiteration: - Recommendation 8: Perform dedicated reviews of banks’ approaches to calculation of expected credit losses (IFRS 9). - Recommendation 9: Maintain use of tools developed for intensified supervision during COVID-19, including monitoring tools. - Recommendation 10: Maintain supervisory focus on valuation consistency, comparability, and independence for residential real estate. Collateral valuation and residential real estate - Central Bank applies EBA/ECB framework intensively and aligns approach with Royal Institution of Chartered Surveyors standards used by valuers in Ireland. - Recommendation 11: Maintain supervisory focus on processes ensuring consistency, comparability, and independence of valuations of residential real estate properties. Selected issues: Brexit, COVID-19, and supervisory cooperation - Brexit changed the framework for supervisory cooperation with U.K. peers; new cooperation protocols and adjusted day-to-day communication are required. - Central Bank preparatory actions for Brexit included a cross Bank Brexit Steering Committee and rigorous authorization assessments for incoming firms, coordinated with the ECB. - For COVID-19, the Central Bank established a COVID-19 Crisis Response Task Force in March 2020, coordinated nationally with the Department of Finance and NTMA under the Financial Stability Group (FSG), and produced forward-looking projections of the capital position of the domestic retail-banking sector under two macroeconomic scenarios over the "2020-2022" horizon, finding the system’s loss-absorbing capacity sufficient to absorb shocks "materially worse than baseline projections." Dividend policy and supervisory communications - Since March 2020, the Central Bank encouraged credit institutions to refrain from paying dividends or performing share buybacks. - From "February 18, 2021", distributions became generally possible subject to quantitative limits and supervisors’ prudence assessments. - Since March 2020, only two credit institutions have made dividend distributions (no share buy-backs); both distributions were atypical and related to changes in group structures. Industry measures and borrower support - Payment breaks under the Irish non-legislative moratoria program were offered until "September 30, 2020." - Aggregate usage in 2020: - Over "172,000 accounts" - Representing over "EUR 23 billion of Irish lending" - As of end "December 2020", the vast majority of these payment breaks had expired. - There remain over "29,000 mortgage borrowers with sizeable long-term arrears (greater than one year)" whose distress pre-dates the COVID-19 pandemic. Climate-related financial risks - Climate-related financial risks are having an increasingly material impact on financial systems. - The Irish authorities have taken a pro-active approach, benefiting from initiatives by the EU and SSM. - ECB actions: - Published its “Guide on Climate-related and Environmental Risks” for SIs in 2020. - Planned climate risk stress test in 2022. - ECB survey findings: "Over 60 percent of banks" considered some supervisory expectations to a reasonable degree; less than "around two-fifths of banks" have developed (broadly) adequate plans in operational risk management, liquidity risk management, reporting and disclosures. - Central Bank actions and recommendations for LSIs: - Recommendation 12: Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level. - The Central Bank established a high-level multi-year strategic workplan organized in clusters: (i) climate change and macro-financial linkages, (ii) promoting the safety and soundness of regulated firms, (iii) sustainable finance, (iv) filling data gaps, and (v) external engagement. - Recommendation 13: Adopt a sequenced action plan to develop approaches to manage climate-related financial risks in priority areas; emphasize robust data and quality disclosure early. - Supervisory assessments, data and capacity building: - A first climate risk horizontal assessment was performed in 2021 via a Central Bank self-assessment to LSIs; results indicate integration of climate-related risks into materiality risk assessments requires considerable development. - The Central Bank is developing a climate risk database and dashboard and issued a supervisory expectation letter to all banks to support these activities. Appendix IV — EU Implementation of Basel III - 2017 and 2019 EU legislation implemented Basel III concepts including: - Leverage ratio requirement for all institutions. - Leverage ratio buffer for global systemically important institutions. - Net Stable Funding Requirement (NSFR). - New market-risk framework (FRTB) adopted for reporting purposes. - The 2019 package introduced elements not aligned with Basel III (preferential capital treatments for infrastructure, SMEs; exemptions from CVA for specified transactions). - EU Commission proposal timing: - If adopted as proposed, implementation of Basel III would commence from "January 2025", with the output floor phased in fully by "2030." - The BCBS revised target implementation date was "January 2023", with phasing fully implemented by "January 1, 2027." - Targeted transitional arrangements delay impact for certain exposures: unrated companies and low risk mortgages to "December 2032"; derivatives to "December 2029." - Output floor definition: - Banks must ensure their RWAs or Total Risk Exposure Amount (TREA) via internal models are not lower than "72.5 percent" of RWAs generated by standardized approaches. *Source: EXECUTIVE SUMMARY and selected chapters (1irlea2022006).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Key findings - Supervision of less significant institutions (LSIs) is largely effective in Ireland. The Central Bank’s supervisory approach to LSIs is intrusive and well-developed supervisory tools are appropriately applied. - The supervision leverages its membership in the Single Supervisory Mechanism (SSM) to enhance capacity of tools and approaches. - Supervision has sufficient rigor, although some gaps in the enforcement framework remain to be covered by the legislative changes planned for 2022. - Supervisory responses to changing conditions are timely and agile. The expertise of supervisors is expanding with market development, although keeping up its pace can be a challenge. - The independence of banking supervision is strong in practice and benefits from the safeguards of the SSM. Recent efforts to enhance cooperation between prudential and conduct supervision under the Central Bank’s “One Bank” approach have raised supervisory quality, with scope for further enhancements. - Prudential regulation of banks has improved greatly since the 2016 FSAP. The EU framework has largely embraced international regulatory reforms and responded to legacy NPL issues. - The Irish Government provided extraordinary financial support to individuals and businesses in reaction to the pandemic crisis; Irish and EU legislators introduced regulatory flexibility while maintaining steering principles and not slipping to regulatory forbearance. - The Central Bank applies the entire SSM regulations to its LSIs, providing a strong supervisory framework consistent and proportionate compared to that applied to Significant Institutions (SIs). - The banking supervision has been tested by major shocks—Brexit and the COVID-19 pandemic—with outcomes still unfolding. Climate risk is an emerging, growing challenge across supervisory dossiers. ### Areas requiring continued supervisory focus - Mitigation/management of the impact of the COVID-19 pandemic: - Banking supervision will need to follow up on latent credit risk with sufficient intrusiveness to ensure that all relevant indicators measuring credit risks are accurately calibrated, while monitoring capital and liquidity positions with increased intensity. - Transformation of business and operational models in retail banking services: - Requires consistent rigor in application of existing core approaches (embedded in the supervisory review process), supplementary tools, and conceptual changes in frameworks to assure consistent and proportionate regulatory and supervisory approaches across institutions. - Continuous upgrades in supervision of international/investment banking: - Supervision must upgrade capacity in response to growing size and complexity of international banking businesses, factoring in cooperation benefits within the SSM and outside the EA. - Constitution of climate-related financial risks supervision: - The increasing importance of climate-related risks will require a robust supervisory approach to manage new risks and additional complexities. ### Context and scope - The Irish banking system has experienced significant changes reflecting issues of business model sustainability in retail banking and absorbing the impact of Brexit. Profitability of retail banks is impacted by the low interest rate environment and concentrated interest-income streams. International banks from outside the EU find Ireland an attractive location to establish operations for the EU-27. - The process of business-model transformation will require time and focused supervisory attention and may be accompanied by further market concentration. With increased concentration in the retail banking market, the role of the state as a significant owner of banks will grow, unless it decides to withdraw. - Competition from the EU single market and new technology will put additional pressure on Irish banks’ transformation. Supervision of international banks brings opportunities and challenges and increases pressure on talent availability. - The EU regulatory framework has strengthened dramatically since the 2016 FSAP, including with implementation of Basel III, although some additional steps remain. The regulatory framework also responded to NPL issues and introduced initiatives addressing climate and environmental risks. - Since the last FSAP, the Central Bank established a firm position in the SSM. The supervisory approach to struggling business models was put in place; ultimate success depends on development of supporting tools and progress in other mandate areas. The overall outcome of the COVID-19 pandemic crisis is still unfolding; climate-related financial risks are the overarching challenge ahead. - This Technical Note was prepared by David Lukáš Rozumek, Monetary and Capital Markets Department, in the context of the 2022 Ireland Financial Sector Assessment Program. - Scope: The note primarily focuses on the Central Bank’s supervision of Irish LSIs within the broader EU regulatory environment and uses selected Basel Core Principles (BCP) as a guiding structure. The mission selected CP2, CP3, CP5, CP8, CP9, CP13, CP14, CP15, CP17, CP18, CP19, CP20, CP22, and CP26 to structure discussions. The Central Bank prepared a self-assessment anchored by these CPs; the review also considered Brexit, the COVID-19 pandemic crisis and climate risk. ### Main recommendations (organized by theme; priority and timeframe preserved) Organization of supervision 1. Amend the Central Bank Act or other appropriate legislation such that the Minister of Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct (¶ 31). - Addressee: DoF, Oireachtas - Priority: M - Timeframe: ST 2. Enshrine in legislation a written procedure for the submission by the Central Bank and approval by MFIN of the supervisory levy. (¶ 33). - Addressee: DoF, Oireachtas - Priority: M - Timeframe: ST 3. Apply sufficient flexibility on remuneration to recruit and retain appropriate talent (¶ 34). - Addressee: Central Bank - Priority: M - Timeframe: ST 4. Continue adapting supervisory capacity and tightening supervisory cooperation to reflect increasingly complex business and operational models of international LSIs, seeking to maintain consistency in supervisory approaches and techniques across international SIs and LSIs, with due regard to the nature, scale, and complexity of specific banks (¶ 36). - Addressee: Central Bank - Priority: M - Timeframe: MT 5. Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime (¶ 39). - Addressee: DoF, Oireachtas, Central Bank - Priority: H - Timeframe: MT 6. Expand collaboration across conduct, consumer protection, and prudential supervision, to unleash the full potential of supervisory functions integrated under the ‘One Bank’ approach, while adjusting the underlying cooperation arrangements and operational processes (¶ 49). - Addressee: Central Bank - Priority: M - Timeframe: ST Supervisory Approach, Tools 7. Intensify ongoing efforts to implement the report on “Behavior and Culture in Irish Retail Banks” in systematic supervision of individual banks, and by connecting findings with prudential supervision outcomes on an individual bank level (¶ 69). - Addressee: Central Bank - Priority: M - Timeframe: ST Credit Risk 8. Perform dedicated reviews of banks’ approaches to the calculation of expected credit losses, reflecting on findings from the COVID-19 pandemic crisis as well as broader experience since the implementation of the IFRS 9 (¶ 76). - Addressee: Central Bank - Priority: H - Timeframe: ST 9. Maintain the use of tools developed for intensified supervision during the COVID-19 pandemic crisis, where practical and appropriate, including the monitoring tools to identify latent credit risk and to ensure accuracy of banks’ credit reviews and credit risk indicators (¶ 78). - Addressee: Central Bank - Priority: H - Timeframe: ST 10. Maintain the supervisory focus on banks’ processes ensuring consistency, comparability, and the independence of valuations of residential real estate properties (¶ 81). - Addressee: Central Bank - Priority: M - Timeframe: MT Climate Risk 11. Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level, respecting the independent mandate of the Central Bank (¶ 114). - Addressee: Government, Central Bank, DoF - Priority: H - Timeframe: I 12. Adopt a sequenced action plan to manage climate-related financial risks in priority areas. Put the emphasis on robust data and quality disclosure in the early stages (¶ 117). - Addressee: Central Bank - Priority: H - Timeframe: I *Source: EXECUTIVE SUMMARY (1irlea2022006).* ### 7. A broader focus, on all banks (LSIs and SIs), was applied in three cross-cutting areas – ### 7. A broader focus, on all banks (LSIs and SIs), was applied in three cross-cutting areas – ### Cross-cutting focus: Brexit, COVID-19 pandemic, and climate risk - Brexit and COVID-19 were identified as "issues of particular concern" at the time of the FSAP. - Brexit effects: - Changed the institutional landscape with "heightened demands on supervision from new complex institutions moving to Ireland from the United Kingdom (U.K.)". - Introduced cross-border issues on supervisory coordination and collaboration for both home and host supervisors. - Mission inquired about impacts on supervisory colleges for foreign banks in Ireland and EU-U.K. agreements on cross-border issues. - COVID-19 effects: - Major support measures are being wound down, raising concerns about asset quality as support to households and businesses is unwound. - "Considerable fiscal and supervisory relief has mitigated the impact of the pandemic" but asset quality issues that have/may emerge were examined. - Climate risk: - Explored supervisory approaches to climate risk to provide context for the resilience assessment agreed with the Central Bank and ECB. - Targeted review of SSM functioning performed to understand strengths and potential weaknesses in the Irish supervisory landscape. ### Market structure — key facts and trends - Sector-wide changes since the 2016 FSAP were "partly driven by the United Kingdom’s departure from the European Union (Brexit)". - Aggregate and segmental figures: - Banking sector saw "annual growth of 13 percent in balance sheet size" in 2020. - Retail banks: - Account for "approximately 50 percent of the banking sector". - Comprised of "five retail banks focused largely on the domestic market" with combined assets of "EUR 290 billion in 2020". - Three of these institutions are Irish-owned. - The Irish state "gradually decreases its stake in two of them through share trading plans". - Two retail banks have foreign parents and "recently announced their intention to exit from the Irish retail banking sector"; their business expected to be largely taken over by domestic Irish-owned banks, increasing concentration. - Despite challenges, the retail segment "grew by 5 percent in 2020". - Investment banks: - Represent "approximately 40 percent of the banking sector". - Include "three investment banks". - Combined assets of "EUR 250 billion in 2020, compared to EUR 32 billion in 2015". - Business lines are largely wholesale: leveraged finance, investment grade/sub investment grade lending, derivative trading and hedging activities. - Other international banks: - Nine banks in this segment, accounting for "approximately 10 percent of the banking sector". - Since 2016, assets in this segment "have dropped by approximately 40 percent, to EUR 65 billion in 2020". - Many are subsidiaries of large international banks/groups and rely on parental funding. - Notes on complexity and internationalization: - Investment banks have "brought a greater concentration of cross border activities" given their international profile and client base. - Asset size does not fully capture increases in complexity and internationalization. ### Risks and challenges - Ongoing and emerging risks: - "The remaining impact of Brexit is still unfolding" and "the threat of further deterioration in credit portfolios/latent credit risk following COVID-19 is still present." - From a retail bank perspective, distressed debt remains a feature with downside risks as government support is withdrawn. - The pandemic "underscores the need for banks to consider downside risks, complete robust capital assessments, and maintain adequate capital buffers". - Climate risk: - "Climate risk, both physical and transitional, brings heightened risks to bank’s balance sheets." - A cohort of LSIs are "particularly exposed to the transition risk of climate change" with majority having exposures to climate-relevant sectors. - "A smaller number of LSIs is directly exposed to the physical impacts of climate change through their third-party providers of support services." - Profitability and business model sustainability: - Retail banks face "low profitability" from high operating costs, less diversified income, low interest rates, and elevated credit-risk costs. - Challenges to rationalizing operational costs include growing demand for talent and "costly and potentially complicated upgrades to IT systems". - Credit costs may be further impacted by the pandemic, including second round economic effects. - Relatively higher interest rates on lending will reflect these costs and long term "higher risk weighted assets’ (RWA) density of mortgage exposures... caused by high Loss Given Default – LGDs, as well as Probability of Default - PDs". - Competition from new entrants benefits those firms through modern IT architecture, flexibility, and "lower regulatory costs for nonbanks". ### Banking supervision in Ireland — institutional arrangements and priorities - Integration with EU framework: - "Banking supervision in Ireland is integrated into the EU regulatory and supervisory system." - The Central Bank closely follows the EU Single Rulebook and the SSM regulation and "applies the EU/SSM regulation to LSIs." - The Central Bank participates actively in SSM and EBA structures (SSM networks, Supervisory Board, EBA Standing Committees, Sub-Groups, Board of Supervisors). - Evidence gathered that "common SSM methodologies, processes, and procedures... are largely operational in the Central Bank." - ECB oversight of LSI supervision: - Since the 2016 FSAP the role of the ECB in oversight of LSI supervision "has increased." - SSM sets high-level priorities for SIs; supervisory priorities for LSIs are set by NCAs and "should mirror the risks and challenges faced by the LSI sector." - The Central Bank shares a summary report with the ECB listing key risks to LSIs and supervisory priorities. - ECB provides methodology for LSI supervision and "may provide views on individual supervisory cases" via notifications of financial deterioration cases and draft decisions for high-priority LSIs. - ECB maintains a dedicated country desk engaged in continuous communication and "has access to all relevant data related to LSIs." - The Central Bank uses the ECB’s IMAS system to upload risk assessments and carry out the SREP for LSIs. - Increased cooperation with global regulators: - Post-Brexit market developments prompted the Central Bank to "promote close cooperation with other European and third country regulators" especially regarding international banks (LSIs), including participation in periodic supervisory and crisis management colleges. - Central Bank strategic priorities at the time of the mission (2021): - (i) Maintain "supervisory focus on financial and operational resilience" to ensure banks continue to support households and business through COVID-19 disruption. - (ii) Improve "governance and risk management capabilities, including the risks from disruptive change such as climate change." - (iii) Identify, prevent or mitigate "detrimental consumer outcomes," including those arising from the pandemic. - (iv) Resolve "pandemic-related and longer-term distressed debt," ensure fair treatment of borrowers in financial distress, and preserve financial stability. - Central Bank strategy outlook for 2022-26 — four connected themes: - (i) Being future focused: anticipating and responding proactively to changes with emphasis on technological innovation, climate transition, geo-political change, and COVID-19 developments. - (ii) Being open and engaged: build trust and understanding through stronger engagement with public, stakeholders and peers. - (iii) Transform the Central Bank: become "a more agile, resilient, diverse and intelligence-led organization." - (iv) Safeguarding: "continue to evolve our key policy frameworks and approaches, strengthening the ability to maintain price stability and the resilience of the financial system, while ensuring the best interests of consumers are protected." ### Regulatory and legislative developments since 2016 - EU legislative initiatives highlighted: - Securitization (2017/2401; 2017/2402): amended capital requirements for securitization exposures. - NPL Backstop (2019/630): introduced new minimum loss coverage provisioning requirements for exposures originated after the Regulation which subsequently turn non-performing. - CRR II (2019/876): implements binding Net Stable Funding Ratio (NSFR) & Leverage Ratio, with changes linked to Basel FRTB, SA CCR, TLAC and a revised Pillar 2. - CRD V (2019/878): requirements in relation to IPU, financial holding companies, systemic risk buffer and Pillar 2 Requirements & Guidance. - COVID-19 “quick fix” (2020/873): modified implementation timelines for certain aspects of CRR II, along with additional flexibilities (e.g., extended IFRS transitional arrangements). - BRRD II (2019/879): further strengthens the recovery and resolution regime as regards loss-absorbing and recapitalization capacity. - Covered Bonds (Directive 2019/2162): sets out requirements for national covered bond frameworks. - PSDII (2015/2366): aims to make payments more secure, boost innovation and open up payment markets to new nonbank entrants. - Impact on nonperforming exposures (NPEs) and borrower treatment: - EU initiatives and Central Bank actions contributed to a reduction in nonperforming loans "from levels above 20 percent to 5 percent of total loans before the pandemic." - The Central Bank’s CIB has sought to ensure lenders implement long-term solutions for commercial and mortgage arrears that are sustainable for firms and borrowers. - EBA guidance: - In late 2016, the EBA published "Guidelines on the application of the definition of default" prescribing additional criteria for identification of non-performing and distressed credit, including days past due and indications of unlikeliness to pay. *Source: 1irlea2022006 - 7. A broader focus, on all banks (LSIs and SIs), was applied in three cross-cutting areas –* ### 25. Later, the ECB introduced—in several steps—supervisory expectations for prudential ### 25. Later, the ECB introduced—in several steps—supervisory expectations for prudential provisioning under Pillar 2. ### ECB supervisory expectations and NPE provisioning - Guidance to banks on NPLs published in March 2017: the ECB expects banks to set internal coverage thresholds for NPLs, depending on their risk profile. - Addendum to the ECB Guidance published in March 2018: clarifies supervisory expectations for prudential provisioning of new NPEs (i.e., exposures classified as non-performing according to the EBA’s definition, from 1 April 2018 onwards). Where banks fell short of these expectations after a phase-in period the SSM could impose a deduction to CET1 capital under Pillar 2. - Supervisory expectations for provisioning of NPE stock (exposures classified as NPE on 31 March 2018): starting point of 2/7 years vintage buckets for unsecured/secured NPEs, subject to supervisory coverage recommendations and phase-in paths. - The Central Bank chaired the SSM task force and actively contributed to setting supervisory expectations; the ECB supervisory expectations for the provisioning of NPE stock (press release issued on July 11, 2018) was reflected in increased provisions, gradually growing since 2020. - Bank feedback: sales of NPL portfolios by Irish retail banks were driven by a number of factors; banks met by the mission cited provision requirements as an important factor (in some cases as a driving factor). Current provisions largely reflect the ECB supervisory expectations for the provisioning of NPE stock. ### EU CRR Pillar 1 prudential backstop for NPEs - The EU regulation established a minimum loss coverage for NPEs and introduced a Pillar 1 "prudential backstop" requiring automatic deductions from own funds where NPEs are not sufficiently covered by provisions or other adjustments. - Statutory prudential treatment under Pillar 1 applies to NPEs arising from loans originated from April 26, 2019, onwards. - Forbearance measures granted to a NPE do not discontinue NPE classification unless strict discontinuation criteria are met. - Pillar 1 NPE treatment timelines: - (i) after three years of NPE status for unsecured NPEs; - (ii) after nine years of NPE status for secured NPEs secured by immovable collateral and residential loans guaranteed by an eligible protection provider; - (iii) after seven years of NPE status for other secured NPEs. - The Pillar 1 treatment starts at three years, so the impact will commence only from 2022 onwards. Banks are already taking this requirement into consideration while managing their NPL portfolios. - A quantitative impact of the CRR backstop phase-in on banks has not yet been completed. ### COVID-19 capital "quick fix" and temporary reliefs - In response to the COVID-19 pandemic, the EU adopted an amendment to capital regulation known as the “quick fix”, providing temporary reliefs and modified implementation timelines for certain aspects of CRR II, and additional flexibilities such as extended IFRS transitional arrangements. - Examples of changes introduced by the quick fix: - The application of the Global Systemically Important Institutions leverage ratio buffer was deferred by one year (until January 2023). - A temporary (until June 27, 2021) and conditional exclusion of certain exposures to central banks from the total exposure measure was introduced. - The application of a revised SME factor and infrastructure supporting factor were accelerated (effective on the date of entry into force of the CRR “quick fix”, instead of June 2021). ### Supervisory independence, governance, and resources - Legal framework gap: legislation provides the Minister for Finance with potential points of influence into the policy making process, including approval of the levy structure to fund supervision and the power to remove Commission members for specified reasons which are broad in nature and interpretation. There is no evidence these powers have impinged on day-to-day operational independence, but amendments are encouraged to strengthen de jure independence. - Central Bank governance: - The Central Bank is headed by a Commission: the Governor, two Deputy Governors, the Secretary General of the Department of Finance, and at least six but no more than eight other members appointed by the Minister of Finance. There are currently six appointed members. - Legislation specifies circumstances for removal of the Governor, but the Minister has wide discretion to dismiss other Commission members. - Funding and resources: - The Central Bank has a stable and continuous source of funding sufficient to meet operational and regulatory needs and recovers much of its regulatory costs through the industry funding levy, the calculation of which is carried out according to a robust process within the Central Bank. - The legislation provides for Ministerial approval of the levy; if the levy is insufficient the Central Bank may direct other funds to meet the shortfall. - Since 2015 the Central Bank has steadily increased the proportion of costs attributable to industry and has aligned pay with public sector pay agreements and a global grading salary structure. - Talent and capacity risks: - Talent market conditions may affect the Central Bank’s ability to retain staff in specialist areas. - Brexit has materially expanded the scale and complexity of risks in Ireland, increasing pressures on Central Bank resources. - The Central Bank has recruited subject matter experts with capital markets experience and built horizontal support functions and analytics (PAID) to supervise complex and international operations. - The Central Bank should continue to adapt supervisory capacity and align techniques with the SSM for SIs where proportionate. ### Individual accountability, enforcement powers, and organization of supervision - Individual Accountability Framework (IAF) components identified in the Central Bank’s 2018 report: - Senior Executive Accountability Regime (SEAR): firms to set out clearly where responsibility and decision-making lie. - Enforceable Conduct Standards: expected behaviors including honesty, integrity, due skill, care, diligence, and acting in consumers’ best interests. - Enhanced Fitness & Probity Regime: greater onus on firms to certify staff are fit and proper. - Strengthened Administrative Sanctions Procedure: enable individuals to be pursued directly for misconduct rather than only where they participated in firm wrongdoing; aim for greater process efficiency, clarity, and consistency. - Legislative process: - A legislative process has been launched to put in place the individual accountability framework, including enhancements to the administrative sanctions regime. The process is led by the Department of Finance and the Central Bank has been heavily involved in drafting. The Central Bank hopes for enactment as soon as possible. - Organization of supervision and “One Bank” approach: - Post-GFC restructuring organized financial regulation under two pillars: Prudential Regulation and Financial Conduct. - Prudential Regulation pillar included directorates for credit institutions; insurance; and asset management supervision and is led by the Deputy Governor (Prudential Regulation). - Financial Conduct pillar includes consumer protection; securities and markets supervision; and enforcement and is led by the Director General (Financial Conduct). - Restructuring created Investment Banking and Broker-Dealer supervision division (IBBD) and Prudential Analytics and Inspections directorate (PAID) to supervise complex international activities that expanded with Brexit. - Consumer protection activities were centralized into a new Financial Conduct Pillar; Consumer Policy moved to Financial Regulation—Policy and Risk Directorate to enable holistic policy formulation. - Committees (e.g., Supervisory Risk Committee) were established to ensure high-level alignment across Pillars; technical cooperation relies on everyday communication between managers and experts. - The Central Bank has applied a progressive “One Bank” approach in priority planning, multi-year strategy implementation, pooling of technical expertise, enhancing data analytics, and expanding horizontal risk views. Greater long-term integration and focused cross-Pillar work on particular banks is recommended to maximize synergies between prudential and conduct supervision. ### Key recommendations - Recommendation 1: Amend the Central Bank Act or other appropriate legislation such that the Minister of Finance may dismiss Central Bank Commission members only on one or more specified grounds of serious misconduct. - Recommendation 2: Enshrine in legislation a written procedure for the submission by the Central Bank and approval by MFIN of the supervisory levy. The legislation would: (i) Set out expectations on the timing for the process; (ii) Formalize the Bank’s stakeholder engagement process; and (iii) Ensure transparency of decision-making, including on any divergence between the Central Bank’s proposal and the regulations ultimately approved by the Minister of Finance. - Recommendation 3: Apply sufficient flexibility on remuneration to recruit and retain appropriate talent. - Recommendation 4: Continue adapting supervisory capacity and tightening supervisory cooperation to reflect increasingly complex business and operational models of international LSIs, seeking to maintain consistency in supervisory approaches and techniques across international SIs and LSIs, with due regard to the nature, scale, and complexity of specific banks. - Recommendation 5: Amend relevant legislation to provide for greater individual accountability and enhance powers of the Central Bank to take direct enforcement action against individuals. Finalize related internal framework to operationalize execution of the upgraded accountability regime. *Source: IMF staff summary of chapter content.* ### 45. The “One Bank” approach served supervisors well in the demanding conditions of the ### The “One Bank” approach served supervisors well in the demanding conditions of the COVID-19 pandemic crisis. ### One Bank approach: design, benefits, and governance - The “One Bank” approach sharpened understanding of the financial system’s situation during the COVID-19 pandemic crisis, expanded supervisors’ toolboxes, and allowed better targeting of supervisory actions. - Close cooperation between prudential and conduct supervision increased efficiency of supervisory action: - Consumer protection measures were crafted to support overall financial stability. - Feedback from prudential supervision contributed to the efficiency of consumer protection actions (which helped stabilizing the market). - The Central Bank considers prudential and financial conduct regulation to be intertwined by common long-term goals. - Financial supervision objectives of the Central Bank: - To maintain the stability of the financial system; - To promote high levels of trust and confidence in the financial system via proper and effective regulation of financial service providers, such that: - Inappropriate losses are not incurred by users of financial services; - Customers are treated fairly, and consumer and investor interests are protected; - The system is not abused for money laundering or terrorist financing purposes; - The system is governed and managed by individuals who behave in a manner consistent with our standards of fitness and probity; - To pursue the orderly and proper functioning of financial markets. - Keys to success of the “One Bank” approach: - Projecting long-term goals to concrete activities and maintaining deep coordination across functions, anchored in strong governance. - Continuing efforts at all organizational levels with shared understanding of specific roles of management layers and team members. - A strong governance structure with formalized processes across the organization to support coordinated and efficient supervisory action and to manage risks such as short-termism or competing mandates. - Day-to-day informal cooperation of experts and close dialogue of supervision management, supported by systematic measures: regular consultations, quarterly meetings of teams supervising a particular bank, and consistent encouragement by senior management. - Holistic coordination anchored by “One Bank” ensures the Central Bank speaks with one voice: - Enhances effectiveness of supervisory communication and can prevent duplication of supervisory requests toward banks. - Supports cross-fertilizing of supervisory activities between prudential and conduct supervision. - Examples from Central Bank practice: ‘Dear CEO distressed debt letters’, the ‘Behavior and Culture’ report, and public speeches. - Long-term measures supporting the approach include periodic meetings with LSIs’ senior management led by prudential and conduct supervisors side-by-side, and a system recording and sharing information about operational communication with LSIs across functions. - Recommendation 6: - Expand collaboration across conduct, consumer protection, and prudential supervision to unleash the full potential of supervisory functions integrated under the ‘One Bank’ approach, while adjusting the underlying cooperation arrangements and operational processes. ### Supervisory process: SREP and supporting tools - The Central Bank’s supervisory process is forward-looking and mostly concentrated in the Supervisory Review and Evaluation Process (SREP). - Since the 2016 FSAP, the Central Bank adopted the SSM LSI SREP Methodology. - SREP purpose and inputs: - Main tool to steer the supervisory process and assess on an ongoing basis the nature, impact, and scope of risks for banks. - Involves a comprehensive assessment of banks’ strategies, processes and risks, and takes a forward-looking view to determine how much capital and liquidity each bank needs to cover its risks. - When determining future supervisory engagement for an LSI, supervisors consider: - Central Bank strategy and financial regulation priorities; - Outcomes of the SREP assessment; - Outcomes of inspections or thematic reviews on the LSI; - Outcomes of thematic cross-bank working groups assessing emerging risks (i.e., Brexit and COVID-19); - Meetings with banks’ senior management; and - Reviews of regulatory returns. - SREP qualitative and quantitative assessments are thorough and draw on multiple inputs: - Review of bank’s risk appetite framework (RAF), risk reports submitted to the Board and Board Committees, Board documentation including minutes. - Meetings with Board and senior management for additional information. - Quantitative inputs include capital and financial reporting regimes (COREP and FINREP) and granular data about individual positions. - Supervision uses a mix of in-house models and supervisory judgement to challenge a bank’s economic capital quantifications (presented in the ICAAP). - Supervision challenges the bank’s ICAAP stress testing framework using: - An in-house top-down model based on the EBA Stress testing methodology; and - Bottom-up stress testing models based on bank-specific data requests. - Quantitative reviews of ILAAPs are conducted using the Central Bank’s own stress testing tool (the Liquidity Sensitivity Tool). - SREP outcomes and enforcement tools: - Possible supervisory outcomes include capital requirements, liquidity requirements, and other qualitative or quantitative measures, generally in the form of risk mitigation programs (RMPs). - RMPs are actions imposed on LSIs to resolve/mitigate unacceptable risks and/or deficiencies. - For serious risks/deficiencies, more impactful supervisory actions may be utilized, including instructing regulated financial services providers to appoint a third party or 'skilled person' to prepare a report in respect of any regulatory matter directed by Central Bank. - The credible threat of enforcement underpins the Central Bank’s approach to supervision. - Communication of SREP: - Output of SREP is communicated to a bank’s senior management in a supervisory dialogue and in a letter outlining areas of heightened risk and supervisory expectations regarding RMPs. - Purpose is to reduce risks and ensure management buy-in for risk identification and mitigation. - The Central Bank’s communication of SREP results (including RMPs) is clear, comprehensive and well-structured, with positive feedback from banks. - Use of additional taskforces and documents for non-SSM SREP risks: - ECB Guide on Climate-Related and Environmental Risks used as guide; Central Bank developed internal methodology for assessing these risks for LSIs in 2021 and completed a pilot assessment exercise. - Dedicated COVID-19 task force assessed forward-looking resilience of the banking system, credit conditions, and distressed debt levels; outputs informed SREP risk scores and day-to-day supervisory engagement. - Horizontal analytical reports informing supervision include: - Liquidity and credit packs (monthly), financial stability monitoring regime, and quarterly banking risk analysis pack. ### Supervisory approach and coordination with ECB - The Central Bank’s supervision is risk-based, intrusive, analytical, and outcomes-focused. - Four overarching supervisory outcomes for LSIs: - Have sustainable business models; - Sufficient financial resources, including through times of plausible and severe stresses; - Are well governed, with appropriate cultures and effective risk management; - Can recover if they get into difficulty and are resolvable without recourse to taxpayer assistance, if they cannot. - Broader financial supervision objectives also aim to ensure inappropriate losses are not incurred by users of financial services and that customers are treated fairly and consumer and investor interests are protected. - Cooperation and reporting to the ECB: - The ECB exercises oversight based on the SSM Regulation (SSMR) and SSM Framework Regulation (SSMFR). - The Central Bank must report regularly on LSIs per the SSM’s Notification Framework for Less Significant Institutions. - Certain material supervisory procedures or draft decisions must be provided to the SSM on an ex-ante basis (e.g., removal of board members, appointment of special managers, early intervention measures, breaches of capital requirements, other material developments/actions). - Annual ex-post information to the SSM includes SREP decisions, supervisory measures imposed on LSIs, details of waivers granted to LSIs, and standard templates for each LSI that feed into the SSM’s annual risk report on LSIs. - LSI classification and prioritization: - The SSM’s classification system underpins a proportionate approach: high priority LSIs; medium priority LSIs; low priority LSIs. - Effective as of 2022, prioritization will be replaced by new categories of high-impact, high-risk and other LSIs. - Supervisory Manual provides that the intensity of the ECB’s oversight increases proportionately with each LSI’s risk classification. - Country Desk and coordination: - The Country Desk of the ECB coordinates communication with the Central Bank via an automated notification system and follow-up interactions (calls, e-mails, exchange of documents). - The Country Desk drafts non-binding ECB views, submitted to the Central Bank no longer than 10 working days after notification. - The ECB dedicates 1 FTE to oversight of the supervision of LSIs in Ireland. ### Business models: assessment methodology and practice - Focus on business model sustainability and viability is articulated through comprehensive assessments outlined by the ECB Supervisory Review Methodology. - Assessment frequency: - Business model assessments are run on a regular basis depending on LSI priority classification, and on an ad hoc basis in response to significant changes in business models. - Time horizons used in assessments: - Short-term time horizon: one year (business model viability). - Medium-term horizon: three–five years (business model sustainability). - Box 1: SSM SREP Business Models Assessment phases - Phase 1: Information gathering and selection of material business areas to identify significant drivers of business model risk. Special attention to areas generating losses or showing strong decline in profitability or material business lines under strategic change; peer group comparison. - Phase 2: Supervisors look at predefined indicators suggesting a score. - Phase 3: Evidence-based supervisory judgement modifies the score; quantitative and qualitative analyses feed into assessments of viability (ability to generate acceptable returns over the following 12 month) and sustainability (ability to generate acceptable returns over a period of three years). Analyses consider the strategic plan and include peer comparisons. - Supervisors take a holistic approach focusing on capacity to address threats and drive business performance; quantitative analysis uses consolidated financial report data and considers risk appetite and risk capacity. - Note: Relevant for high-priority LSIs. - Central Bank practice and outcomes: - Supervisory assessments of business model sustainability are complex and thorough, analyzing medium/long term profitability and responses to external threats. - Assessments consider management objectives in strategy, projected financial performance, structure of revenues and costs, and concentrations. - Supervisory judgement plays a substantial role; analyses combine qualitative and quantitative elements and do not mechanically follow predefined quantitative thresholds. - Final scores for LSIs use the full range of grades; separate scores set for business model viability and sustainability; final score combines both guided by expert judgement and is interpreted in a short narrative. - Outcomes feed into SREP and influence SREP decisions, including Pillar 2 capital requirement. - The Central Bank’s business model assessment process is described as well structured, comprehensive, balanced between flexibility and consistency, and used to full potential in supervisory practice. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022006.pdf* ### 64. In recent years, actions implemented by the Central Bank and European authorities ### In recent years, actions implemented by the Central Bank and European authorities ### Non-performing loans, legacy issues, and implications for bank sustainability - Actions by the Central Bank and European authorities contributed to a reduction in the levels of NPLs in the banking system, which had represented a major hurdle to sustainability of banks’ business models. - Banks still cope with the aftermath of the Global Financial Crisis; some credit quality parameters continue to be influenced by historical data reflecting experience emanating from that time period. - Legacy issues and ongoing issues in foreclosing collateral drive higher credit costs, representing a long-term burden for sustainable business models and financial stability. ### Business model sustainability and supervisory enhancements (Recommendation 7) - Persistent need to improve Irish retail banks’ business model sustainability underscores importance of further developing existing good practice and diversifying the supervisory toolbox. - Possible enhancements: build on strong current practice and complement it with operational tools that refocus on bank-specific detail and follow-up on concrete measures taken by a bank, long-term. - Supervisory messaging should clearly point to the overarching goal of long-term sustainability and reach senior managements, connecting accountability for long-term progress over short-term targets. - Supervision can: - Inspire research projects to investigate root causes and incorporate outcomes into supervisory activities. - Use a comprehensive communication strategy to steer/influence market developments. - Ensure a level playing field for banks vis-à-vis other providers of comparative products/services, leveraging the Central Bank’s multi-functional position to pass findings to supervisors of other sectors/functions. ### Central Bank initiatives on problem loan resolution (Box 2 highlights) - Evolution since 2008 includes: - introduction of Provisioning and collateral valuation guidelines in 2011 and 2012; - imposition in 2013 of bank-wide Mortgage Arrears Resolution Targets (MART) and bank-specific SME targets on the six main mortgage lenders at the time (accounting for approximately 90 per cent of the Irish mortgage market). MART focused on resolving arrears greater than 90 days and comprised: - Proposing sustainable solutions to borrowers; - Concluding those sustainable solutions; - Tracking of subsequent performance rates on the concluded solutions; - publishing the Code of Conduct on Mortgage Arrears (CCMA) in 2009 and subsequent updates; - introduction of mortgage measures in 2015 limiting Loan to Value (LTV) and Loan to Income (LTI) of new lending; - establishment of the Mortgage Arrears Strategy and Implementation Group (MASIG) in 2019; - establishment of the Distressed Debt Working Group (DDWG) in 2020 with deliverables to: - Drive the strategic direction of the Bank’s work on distressed debt; - Design and implement a work program to deliver the Central Bank’s objectives; - Review existing Central Bank structure, frameworks and approach to supervision of lenders’ management of distressed debt and recommend changes; - Proactively engage and communicate with key stakeholders; - Further develop and monitor KPIs on distressed debt and use this analysis to inform work. ### Governance, conduct, and individual accountability (Recommendation 8) - 2018 report on ‘Behavior and Culture’ recommended an enhanced Individual Accountability Framework, going significantly beyond existing enforcement and fit and proper processes. - Supervisory priority: ensure banks have robust oversight over decision-making, with executives taking responsibility and accountability; boards and executives expected to assess consistency of decision-making with organizational culture. - 2019-20 exercise: individual banks’ action plans addressing risks in ‘behavior and culture’; supervision used broad information to assess cultural drivers of misconduct and followed up including in SREPs. - International LSIs: supervision emphasizes governance, risk management and culture, addressing insufficiently localized frameworks via risk mitigation programs and other tools (e.g., skilled person report) and enforcement powers where necessary. - Legislative gaps limit Central Bank options to enhance supervision of individual accountability. The 2018 report suggested a new framework anchored in legislation to include: - Conduct Standards; - a Senior Executive Accountability Regime; - enhancements to the Fitness & Probity Regime and enforcement process. - Once new legislation is enacted, as expected in 2022, the Central Bank can implement the new framework requiring firms to set out responsibility and decision-making clearly. ### Supervision of credit risk: monitoring, ECL/IFRS 9, and ongoing tools (Recommendations 9 and 10) - The Central Bank continuously assesses inherent credit risk of LSIs to ensure robust credit risk management frameworks; retail banks are supervised more intrusively than non-retail banks due to higher inherent credit risk. - LSIs with non-retail activities exhibit relatively lower credit risk profiles due to higher proportions of exposures to lower risk obligors such as credit institutions, investment-grade corporations and central banks; deep-dive assessments (including loan file reviews) are undertaken when LSIs expand activities. - COVID-19 responses: - Enhanced monitoring of emerging credit risk and NPLs, including frequent calls with credit institutions to assess volumes of payment breaks and lenders’ processing capacity. - Monthly submissions received including data on payment breaks and forbearance requests via the ‘Distressed Debt Monitoring Template’. - ECB methodological guidance (in coordination with the IFRS Foundation) during the pandemic emphasized: - regular assessments of borrowers’ unlikeliness to pay, including exposures with general payment moratoria; - using all relevant information and a risk-based approach rather than relying solely on days past due; - estimating provisions using realistic parameters and assumptions appropriate for the current environment; - anchoring IFRS 9 baseline scenarios using ECB forecasts in an unbiased manner, and considering reliable macroeconomic forecasts for specific years rather than through-the-cycle averages; - ensuring overlays are directionally consistent with macroeconomic scenarios based on verifiable evidence. - Central Bank supervisory practice: - Assesses and reviews full year and half year ECL charges and IFRS 9 staging movements, focusing on COVID-19 impacts and management overlays; follow-up has produced SREP findings and improvements in ECL quantification since the pandemic. - Once more data are available, the Central Bank should take a more systematic approach and engage with banks to draw lessons from COVID-19 and broader IFRS 9 experience, prioritizing portfolios especially sensitive to ECL estimation issues. - Recommendation 9: Perform dedicated reviews of banks’ approaches to the calculation of expected credit losses, reflecting on findings from the COVID-19 pandemic crisis as well as broader experience since the implementation of the IFRS 9. - Recommendation 10: Maintain use of tools developed for intensified supervision during the COVID-19 pandemic where practical and appropriate, including monitoring tools to identify latent credit risk and ensure accuracy of banks’ credit reviews and credit risk indicators. - The EBA notes uncertainty about the impact of the phase out of COVID-related support measures on asset quality and urges banks to proactively address deterioration. EBA also highlights concerns about non-prime CRE and signs of overvaluation in residential real estate. ### Collateral valuation and residential real estate (Recommendation 11) - Since 2016, EBA and ECB steps addressed previous lack of clarity in collateral valuation; ECB focuses on immovable property while EBA Guidelines also include movables. - Framework content includes: monitoring and controls; individual valuation vs indexation; appraisers; frequency of valuation; valuation methodology focusing on expected future cash flow (and gone concern approach); back testing; IT databases; valuation of foreclosed assets. - Central Bank applies EBA/ECB framework intensively and aligns approach with Royal Institution of Chartered Surveyors standards used by valuers in Ireland; supervisory dialogue addresses minimum content of appraisal reports, review processes, appraisal validation, alternative valuation development, etc. - Central Bank is encouraged to continue articulating expectations clearly and transparently to promote a level playing field and strengthen banks’ risk management. - Recommendation 11: Maintain supervisory focus on processes ensuring consistency, comparability, and independence of valuations of residential real estate properties. ### Selected issues: Brexit, COVID-19, and supervisory cooperation - Brexit changed the framework for supervisory cooperation with U.K. peers; the United Kingdom became ‘a third country’ requiring new cooperation protocols and adjusted day-to-day communication. - Some supervised banks have parents or subsidiaries in the United Kingdom and some international banks moved EU headquarters to Dublin—creating important supervisory implications. - Ireland faced challenges associated with Brexit and COVID-19, which increased supervisory and policy-maker activity. - The COVID-19 pandemic is ongoing and its economic effects will unfold over time, creating new challenges for supervisors. *Source: IMF staff report excerpt (content unit: 1irlea2022006 - pages 32–37).* ### 83. In addition, there are new challenges to come, with climate-related financial risks ### In addition, there are new challenges to come, with climate-related financial risks ### Climate-related financial risks - Climate-related financial risks are having an increasingly material impact on financial systems. - The Irish authorities have taken a pro-active approach, benefiting from initiatives by the EU and SSM. - Government actions: - Established a system guiding individual departments through the transition. - Created a governance framework with ministers accountable to the Parliament for reaching the agreed goals. - Formed government-led committees to steer these efforts. ### A. Brexit — Role of the ECB (Irish SIs) - ECB supervisory focus and actions: - Continued monitoring and follow-up on how banks are settling within the SSM to ensure compliance with SSM supervisory requirements, expectations, policies and booking model practices. - New Joint Supervisory Teams (JSTs) were set up for Brexit incoming banks. - Comprehensive assessments including an asset quality review and a stress test were/are carried out for the new significant banks in Ireland. - JSTs stress the need for banks to allocate capital, liquidity, and top management with effective responsibility to steer European business; and to allocate appropriate quality and quantity of risk management resources in the Banking Union commensurate with activities and risks. - ECB expects EU products and transactions with EU clients to be booked in the EU and related risk management capabilities to be located in the EU. - ECB conducts assessments including a Desks Mapping Review (DMR) to benchmark booking models against ECB’s Supervisory Expectations on booking models and to refine incoming SIs’ Target Operating Models (TOMs). - ECB is following up on relocation of euro clearing activities from the U.K. to the EU and supports the European Commission working group; monitored developments following the November 2021 EU Commission proposal to extend equivalence for U.K.-based CCPs. - Mission assessment: - Shares ECB concerns and supports steps to enforce legal requirements on booking models and trading activities, demanding relocation of relevant (core) functions to the EU to meet supervisory requirements and limit macroprudential risks. ### A. Brexit — Role of the Central Bank (Irish SIs and LSIs) - Central Bank preparatory actions and priorities: - Established a cross Bank Brexit Steering Committee; identified and sought to mitigate cliff edge risks throughout 2019 and 2020. - Published research and forecasts (Quarterly Bulletins, Financial Stability Review, Economic Letters, Brexit Task Force reports) and analysis related to Brexit risks. - Three main priority areas from a banking supervision perspective: 1. Ensuring existing banks were adequately prepared for a no-deal Brexit. 2. Ensuring a consistent, transparent and robust authorization process for new and expanding firms. 3. Ensuring prudential supervisors were operationally prepared for a no-deal Brexit event. - Worked closely with European and U.K. authorities to ensure continuity of services to Irish consumers in event of a no-deal Brexit. - Authorization process and supervisory assessments: - Central Bank emphasized its gatekeeper role and collaborated with the ECB to ensure authorization assessments were rigorous and consistent. - Contributed significantly to updated SSM authorizations related operational procedures and Brexit policy stances, particularly on booking models. - Authorization reviews focused on strategy, business model, proposed operations, risk profile, governance, risk management, internal control frameworks, funding and liquidity, capital, recovery and resolution plans. - Assessment process: - Conducted in close co-operation with SSM DG Governance and Operations Authorizations Division in the ECB. - Local management governance, regular Steering Committee reports, final review by Central Bank’s Directors; SSM Supervisory Board also updated. - Supervisory evolution and resourcing: - Expanded supervisory techniques and tools to support supervision of capital and liquidity; liquidity and credit risk packs evolved from earlier Brexit monitoring packs. - Increased supervisory focus on credit risk and governance for international banks expanding due to Brexit; resulted in increased resources (human, operational, financial) in international banks. - Performed on-site deep dive of credit risk in one non-retail LSI to assess credit risk granting processes in light of Brexit-related changes. - Resolution function reorganized and resourced to adapt to changes from Brexit and Host banks; internal resolution teams (IRTs) arranged to manage U.K. and U.S. banks respectively to facilitate stakeholder engagement with ECB/NCA, SRB, and U.K./U.S. regulators. - Preliminary resolvability assessment is carried out as part of the Central Bank’s authorization process for all new BRRD firms. ### B. COVID-19 Pandemic Crisis — Role of the ECB (SIs) - ECB pandemic guidance and measures: - Allowed banks to make use of their capital and liquidity buffers to mitigate the impact of the COVID-19 pandemic. - Communicated that banks will be allowed to operate below Pillar 2 Guidance and the combined buffer requirement until at least the end of 2022. - Bank supervisors are monitoring banks’ asset quality closely; ECB is ready to extend the timeline if phasing out of public support measures leads to a surge in distressed loans. - ECB stated rebuilding bank buffers should not hamper banking sector response to expected materialization of credit risk. - ECB expects national competent authorities to apply same treatment to less significant institutions as applied to significant institutions. - ECB found current banks’ capital projections sufficiently reliable to assess dividend pay-outs, with credit quality remaining a concern. - Repealed the recommendation on dividend restrictions as of end of the third quarter of 2021; returned to reviewing dividends and share buybacks as part of normal supervisory process. - ECB’s main areas of attention: classification of loans (Stage 2 under the IFRS), flagging of forbearance measures, timely and adequate assessment of borrowers’ unlikeliness to pay; reflects findings in dialogues and in SREPs; requires remediation plans where appropriate. ### B. COVID-19 Pandemic Crisis — Role of the Central Bank (Irish SIs and LSIs) - Central Bank crisis response and focus: - Invoked crisis management arrangements and established a COVID-19 Crisis Response Task Force in March 2020 to oversee Central Bank’s response across mandates. - Shifted priorities in 2020 to address immediate and longer-term impacts on the economy, financial system, and consumers. - Focus areas included financial resilience and recoverability, operational resilience and business continuity, and credit impacts from distressed debt (payment breaks). - Task Force worked in an integrated way across consumer protection, monetary policy, prudential regulation, macroprudential, resolution and payments mandates. - Central Bank coordinated nationally with the Department of Finance and National Treasury Management Agency (NTMA) under the Financial Stability Group (FSG); FSG’s crisis management arrangements were invoked in March 2020. - Regular engagement with European authorities (ECB, ESA’s, ESRB) on regulatory flexibility arrangements to ensure consistency. - Forward-looking capital assessment: - Produced forward-looking projections of the capital position of the domestic retail-banking sector (the five domestic retail banks in aggregate) under two macroeconomic scenarios over the 2020-2022 horizon. - Found that the loss-absorbing capacity of the system as a whole is sufficient to absorb shocks that are materially worse than baseline projections. - Supervisory collaboration and outcomes: - Supervisors collaborated on financial and operational resilience, distressed debt, recovery and resolution, and forbearance. - Pandemic accelerated aspects of Central Bank’s work on overall financial and operational resilience despite postponement of some activities such as on-site inspections. - Supervisory coverage of key risk categories: - Operational Risk and Resilience: - Intensified supervisory engagement with banks (including daily engagements) to identify business continuity risks early and ensure appropriate action. - Liquidity Risk: - Supervisory techniques and tools to monitor liquidity and capital evolved throughout the pandemic and now form a key part of supervisory programs. - Credit Risk: - Multiple supervisory programs focused on credit risk, including heightened assessment and monitoring of credit portfolios to identify potential deterioration, monthly submission and assessment of bank credit management information, challenges to ECL forecasts and provisioning, and assessments of boards’ and executives’ oversight. - Undertook loan file reviews in retail banks to assess treatment of borrowers who availed COVID-19 Payment Breaks upon expiry. - Conducted desk-based review of credit files of a number of international LSIs to determine likely impacts of COVID-19 and closely monitored off-balance sheet exposures. - Market Risk: - Performed a thematic review of market risk for six banks assessing business models, investment portfolios, HQLA exposures and stress testing key risk drivers (credit spread risk); no significant issues identified, but outputs informed ongoing supervisory engagement. *1irlea2022006 - 83. In addition, there are new challenges to come, with climate-related financial risks* ### 104. Throughout the COVID-19 pandemic, the Central Bank has encouraged credit ### Throughout the COVID-19 pandemic, the Central Bank has encouraged credit ### Dividend policy and supervisory communications - Since March 2020, the Central Bank has encouraged credit institutions under its direct supervision to refrain from paying dividends or performing share buybacks. - Measures were aligned with applicable ESRB, ECB, and EBA recommendations/statements. - From February 18, 2021, when the Central Bank modified its policy stance, distributions became generally possible subject to quantitative limits; institutions planning to distribute were advised to exercise extreme prudence and to discuss planned distributions with supervisors. - Since March 2020, only two credit institutions have made dividend distributions (no share buy-backs); both distributions were atypical and related to changes in group structures. - Decisions and expectations were communicated via: - The Central Bank webpage for Prudential Regulatory Flexibility Measures for Credit Institutions. - Two “Dear CEO” letters addressing: Board oversight and challenge of senior management on COVID-19 Payment breaks; and ongoing assessments of the adequacy, completeness and timeliness of Board reporting of credit risk metrics relevant to the pandemic. ### Industry measures and borrower support - Payment breaks were made available to household and business customers under the Irish non-legislative moratoria program; offered until September 30, 2020 and operated to protect borrowers in line with relevant codes and regulatory requirements. - Aggregate usage in 2020: - Over 172,000 accounts - Representing over EUR 23 billion of Irish lending - As of end December 2020, the vast majority of these payment breaks had expired. - Flexibility and forbearance measures were applied in line with SSM and ESA measures, following requests from Industry Bodies or Individual Firm Requests and through proactive identification by the Central Bank. ### Credit quality outlook and supervisory approach - The large uptake in payment breaks in 2020 pointed to a significant initial impact of the COVID-19 shock on borrowers. - While the majority of loans on COVID-19 payment breaks have returned to full payments, a cohort of lending—especially among highly affected companies—required additional support. - The full degree of financial distress is likely to become apparent as government supports unwind. - Pre-existing borrower distress: there remain over 29,000 mortgage borrowers with sizeable long-term arrears (greater than one year) whose distress pre-dates the COVID-19 pandemic. - Supervisory program changes: - In 2020, supervisory priorities shifted from annual supervisory strategies to an organizational risk-based response to identify, monitor and mitigate immediate pandemic impacts, under the Central Bank COVID-19 Task Force. - The Central Bank plans to retain some supervisory initiatives introduced in response to the pandemic and to integrate learnings into ongoing supervisory approach. ### Climate-related and environmental risks — role of the ECB (SIs) - In 2020, the ECB published its “Guide on Climate-related and Environmental Risks” for banks (SIs), outlining expectations under the current prudential framework for business strategy, governance, risk management, and enhanced disclosures. - The guide is not binding; it serves as a basis for supervisory dialogue and for discussing divergences in institutions’ practices. - The ECB surveyed SIs on implementation progress: - Almost all banks have developed implementation plans in line with the ECB guide and many have started to gradually improve practices. - Plans will lead to considerable progress but do not yet comprehensively ensure most banks can properly manage climate-related risks. - Adequacy across the 13 supervisory expectations varies: - Over 60 percent of banks considered the expectations on the management body, organizational structure and stress testing to a reasonable degree. - Less than around two-fifths of banks have developed plans that are (broadly) adequate in operational risk management, liquidity risk management, reporting and disclosures. - Common gaps: assessment of activities exposed to liability and/or litigation risks driven by climate factors; disclosure policies addressing materiality assessment considerations; disclosure of banks’ financed greenhouse gas emissions. - The ECB plans further development of its supervisory approach, including an upcoming climate risk stress test in 2022. ### Central Bank actions and recommendations for LSIs (non-SI banks) - The Central Bank recognizes its role in reflecting climate change impacts within its mandate but currently has no formal structure to engage directly with Government on this issue; government engagement is planned to be intermediated by the Department of Finance. - Recommendation 12: Set up a formal cooperation mechanism with the Government to support coordination of climate action on a national level, respecting the independent mandate of the Central Bank. - The Central Bank established a high-level multi-year strategic workplan and governance structure organized in clusters: - (i) climate change and macro-financial linkages, (ii) promoting the safety and soundness of regulated firms, (iii) sustainable finance, (iv) filling data gaps, and (v) external engagement. - The workplan should be operationalized by an action plan that: - Introduces clearly prioritized concrete actions bound to specific timelines. - Defines responsibilities for concrete milestones within supervision. - Discusses the question of resources. - Recommendation 13: Adopt a sequenced action plan to develop approaches to manage climate-related financial risks in priority areas. Put the emphasis on robust data and quality disclosure in the early stages. ### Supervisory assessments, data and capacity building - A first climate risk horizontal assessment was performed in 2021: - The Central Bank issued a self-assessment to LSIs to evaluate soundness, effectiveness and comprehensiveness of management of climate-related and environmental risks. - Results indicate integration of climate-related and environmental risks into materiality risk assessments requires considerable development. - Risk Management Frameworks, including risk reporting frameworks, will need significant enhancements. - The Central Bank is encouraged to continue supervisory dialogue, complement high-level reviews with deep dives into specific areas, provide further guidance to LSIs, and increase capacity-building opportunities. - The Central Bank is developing a climate risk database and dashboard: - The dashboard will include a broad range of metrics on climate risk in the Irish financial system and act as a central repository for data relating to climate change and policy developments relevant to Ireland. - A supervisory expectation letter was recently issued to all banks to support these activities. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022006.pdf* ### Appendix IV. EU Implementation of Basel III ### Appendix IV. EU Implementation of Basel III ### Legislative adoption and objectives - The EU reflected the Basel updates to the regulation of securitizations in its legislation in 2017, effective since 2019. - The 2017 updates addressed shortcomings revealed during the financial crisis: mechanistic reliance on external ratings; excessively low risk-weights for highly rated securitization tranches and excessively high risk-weights for low-rated tranches; and insufficient risk-sensitivity. ### 2019 legislative package and Basel III concepts implemented - A legislative package adopted in 2019 implemented several Basel III concepts: - Leverage ratio requirement for all institutions. - A leverage ratio buffer for all global systemically important institutions. - A net stable funding requirement. - A new market-risk framework following a revised fundamental review of the trading book (FRTB) was adopted for reporting purposes only. - The 2019 package also introduced elements not aligned with Basel III: - A new discount on capital requirements for investments in infrastructure. - A more generous discount on capital requirements for exposures to SMEs. - Exemptions from credit valuation adjustment (CVA) for specified transactions (applies for: transactions with non-financial counterparties below the EMIR clearing threshold; transactions between clearing members and clients in the context of indirect clearing, when the clearing member is acting as an intermediary between the client and qualifying central counterparties; transactions with intragroup counterparties; transactions with pension fund counterparties; and transactions with sovereign counterparties). - Crisis-preparedness indicators established by the legislation: - A new total loss absorbing capacity (TLAC) requirement for global systemically important institutions. - Enhanced Minimum Requirement for own funds and Eligible Liabilities (MREL) subordination rules for global systemically important institutions (G-SIIs) and other large banks referred to as top-tier banks. ### EU Commission proposal and timing of Basel III implementation - The latest proposal by the EU Commission suggests a delayed path to finalization: - If adopted as proposed, implementation of Basel III would commence from January 2025, two years after the implementation date proposed by Basel. - The implementation of the output floor comes with a five-year phase-in period, with the framework fully in place by 2030. - By comparison, the revised target implementation date decided by the BCBS was January 2023, with phasing fully implemented by January 1, 2027. - Targeted transitional arrangements that further delay the impact of the output floor: - Unrated companies and low risk mortgages: to December 2032. - Derivatives: to December 2029. - The proposal introduces preferential capital treatments under the standardized approach to credit risk that would lower capital requirements relative to Basel III if adopted: - Project financing. - “Strategic equity exposures” for securities financing transactions. - “Emission Trading System” allowances. ### Output floor definition and objective - The output floor (OF) requirement: - Banks must ensure their risk-weighted assets (RWAs) or Total Risk Exposure Amount (TREA) calculated using their own internal models are not lower than 72.5 percent of the RWAs that their activities would generate based on the standardized approaches. - In other words, it sets a lower limit (“floor”) on the capital requirements (“output”) that banks calculate when using their internal models. - By construction, the OF impacts banks that benefit from lower risk weights using internal models compared with standardized risk weights. - The objective of the OF is to reduce excessive variability of RWAs calculated using internal models and to mitigate model risk. *Source: Appendix IV. EU Implementation of Basel III (content unit: 1irlea2022006).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1irlea2022006.pdf_