Central Bank of Ireland

Transcription

1 Central Bank of Ireland Strategic Plan

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3 TABLE OF CONTENTS Introduction 2 Executive Summary 3 Environmental Context 4 High Level Goals 13

4 INTRODUCTION The Strategic Plan explains how the Central Bank of Ireland intends to deliver on its mission of Safeguarding Stability, Protecting Consumers over the coming three years. We will be exerting our utmost effort to ensure that this period will see considerable further progress in restoring banking and general financial stability and supporting the economic recovery as we work out the legacy of the crisis. We will also deepen the reform of our regulatory supervisory framework to ensure that future risks to stability and consumer protection are minimized, while continuing to promote a better functioning financial sector, and contributing to wider economic policy formulation. I know that the Central Bank s staff will continue to rise to these challenges with the necessary skills, determination and commitment that they have shown to date and for which I am very grateful. Patrick Honohan Governor Central Bank of Ireland 2

5 EXECUTIVE SUMMARY This plan sets out the Bank s key strategic priorities for the three year period 2013 to The Central Bank Acts define the Bank s statutory objectives which correspond to the eight High Level Goals, described in the following pages 1, around which this plan is organised. At their essence these objectives all relate to the Bank s mission of Safeguarding Stability, Protecting Consumers. The Strategic Plan is set in the context of continuing financial stability concerns and challenges to government finances, difficult economic conditions for consumers, businesses and regulated firms and an increasingly international policy-making environment. The key elements are: Restoring financial stability and supporting economic recovery through successful exit from the EU-IMF Programme of Financial Support and restoring a fully functioning banking system. Repairing the finances of the economy in the aftermath of the crisis requires continued careful choice of adjustment measures and systematic implementation of these measures. The Bank s economic and regulatory staff are continuously engaged in the provision of advice to Government, of regulatory guidance to banks, and engagement with external lenders. An extensive plan of action is set out to achieve this, including successful completion of remaining EU- IMF commitments, liquidity support operations, further stress testing and capital assessment, banking and credit union sector restructuring and deleveraging, and troubled portfolio workout. These measures are necessary to restore economic confidence, to ensure the return of the Irish Government to debt markets, lowering funding costs for the taxpayer, business and consumers, and to enable the banking system to support growth in the real economy through the provision of credit. involving roll out and review of the PRISM risk framework, and continuing use of a credible enforcement deterrent. Protecting consumers by challenging firms, improving firms compliance, promoting a better culture in the financial sector and helping consumers have more confidence in financial services. Our work here will include assessing firms compliance through thematic reviews, strengthening client asset safeguards and continuing action on personal debt issues. Influencing the increasingly international policy-making framework for monetary policy, financial stability and regulatory standardsetting. Our plans here include shaping the national and international policy agenda through high-quality research and intensive engagement with the Government as well as with the European Central Bank and European System of Financial Supervision, and by working closely with stakeholders on the implementation of EU Directives and regulations. The Bank will ensure that its important operational responsibilities continue to be discharged. This includes currency operations and maintenance and oversight of payments systems infrastructure, with a leading role in the implementation of the National Payments Plan. Underpinning all these activities, a key focus will be on improved operational efficiency and cost effectiveness, involving a range of measures including budget control and process automation. Key to the successful implementation of the strategy will be the continuing development of the Bank s staff. After a period of significant growth in resources, we envisage a gradual reduction in resources in 2015 due to efficiencies and completion of key initiatives. Reforming the regulatory and supervisory framework to ensure risks to stability and consumer protection are identified and effectively mitigated. In order to ensure maximum protection in this area, we will continue to work for a strengthening of the legislative framework for regulation, as well as fully embedding assertive risk-based supervision, 1 Summarised on page 14 3 Strategic Plan

6 ENVIRONMENTAL CONTEXT The Central Bank of Ireland Strategic Plan is informed by the Bank s mission statement of Safeguarding Stability, Protecting Consumers. This Strategic Plan is being introduced when the Bank faces an especially challenging period in both its domestic- and European-related roles. On the domestic front, Ireland is entering the final year of the three-year EU-IMF Programme, the successful delivery of which is central to the country s economic and financial stabilisation and revival. The Bank will continue to play a key role in the progressive steps that are being taken to repair Ireland s financial sector, to re-establish conditions for the normal supply of credit and to the return of confidence in the economy. The background of a weakening international economy and financial market tensions has made these roles more challenging. On the European front, the Bank has two key fields of operation. As a member of the Eurosystem, the Bank is part of the collective design, analysis, decision-making and implementation of monetary policy and part of a broader response to the financial crisis; while on the regulatory front it will be involved in the design and development of the framework for a new EU-wide Single Supervisory Mechanism (SSM). As part of the Bank s Eurosystem role, the Governor is a member of the ECB Governing Council, which has responsibility for setting monetary policy (interest rates and provision of liquidity), which is then implemented on a decentralised basis by each member state national central bank (NCB). The formulation and implementation of monetary policy will remain challenging over the period of the Strategic Plan. Since the onset of the financial crisis, the ECB has reduced interest rates close to zero per cent and has adopted a number of non-standard monetary policy measures, which include asset purchases, very long term and foreign currency liquidity-providing operations, in response to the malfunctioning in interbank markets and the increased reliance on Eurosystem funding. The monetary transmission mechanism - the channels through which changes in policy rates by the ECB feed through to the real economy - has also been affected and an important on-going challenge is the need to continue to address this malfunctioning. (ESM) to stabilise markets, and a move to a common banking supervision approach, which will have an impact on the Bank s regulatory agenda. Overall, in its role of contributing to financial stability, bringing the economy back to growth and embedding a new regulatory agenda, the Bank will have a greater need for participation in, and advocacy at, the many European institutional fora of which it is a member. EU-IMF Programme In November 2010, Ireland entered into a joint EU-IMF Programme of Financial Support. The Programme has two parts the first part deals with bank restructuring and reorganisation and the second part deals with fiscal policy and structural reform. The Programme is due to conclude at end and will remain a focus of the work of the Bank until then. The primary objective of this far-reaching Programme is to rebuild international market confidence in the Irish economy and the banking system. This will enable the State to return to market funding for sovereign debt at sustainable rates and enable the banks to dispose of non-core assets, revert to normal market funding and progressively reduce their reliance on funding from the Eurosystem and financial support from the Exchequer. The Programme provides a strong foundation for a reformed and restructured banking system. This will be crucial to ensuring that the banks play a full and vital role in underpinning economic recovery and the achievement of the Government s objectives detailed in the National Recovery Plan. In this regard, enhanced and increased economic analysis to allow timely and correct advice to the national authorities will continue to play a very important role. Financial System/Banking Sector Stability Achieving and maintaining the stability of the financial system will continue to be the primary focus for the Bank over the next three years. The Bank s role in contributing to financial stability reflects the critical role a well-functioning financial sector plays in facilitating economic growth. It also reflects the importance of the banking sector to the transmission of monetary policy actions to the real economy. Broader EU developments to stabilise financial markets include a more effective use of funding mechanisms such as the European Financial Stability Facility (EFSF) and the European Stability Mechanism Central Bank of Ireland 4

7 Non-standard measures to improve monetary transmission in the Eurosystem The standard monetary policy implementation measures in the Eurosystem are short-term (one week, one month and three month) repurchase transactions (repos), whereby NCBs lend money to counterparties in domestic markets against adequate acceptable collateral. During the financial crisis as liquidity shortages among financial institutions became more acute, the ECB and other global central banks undertook a number of non-standard measures to encourage lending to the real economy and restore an appropriate monetary policy transmission mechanism to certain markets. The measures include: The provision of unlimited liquidity at fixed rate full allotment; Long Term Refinancing Operations (LTROs) initially providing larger volumes at three-month maturities, then extending repos to one year and eventually, in December 2011 and February 2012, three-year LTROs with an option to end after one year; US dollar liquidity providing operations with coordinated actions announced by the ECB and other global central banks; and Outright asset purchases in malfunctioning markets. Initially, this applied to the Covered Bond market (Covered Bond Purchase Programmes) and this was later extended to the Securities Market Purchase (SMP) Programme to include secondary market purchases of sovereign bonds. Recently, the ECB announced its intention to undertake Outright Monetary Transactions (OMTs) in secondary sovereign bond markets. Following the announcement of the OMTs, the termination of the SMP was announced in September The Bank implements these actions and programmes in the domestic financial market with its eligible counterparties in line with operational modalities and risk control criteria applied consistently across the Eurosystem. The overriding aim of the Bank s work on restructuring of the Irish banking sector is to get the banks to a position where they can support the economy by providing the necessary credit to consumers and businesses. The Bank s work encompasses: the Banking Supervision Strategy which includes implementing the Financial Measures Programme (FMP), ensuring capital adequacy, deleveraging of non-core assets, dealing with distressed portfolios and implementing bank-specific mitigation plans arising from supervisory risk assessments; the provision of liquidity to domestic institutions against adequate collateral, to support banking sector stability and monetary policy transmission; engagement with the European authorities in the development and support for the SSM. Continuing macro and micro analysis of the financial sector s solvency and liquidity positions will be undertaken by the Bank in association with other domestic and international authorities. In 2013, the Bank will have a key role in ensuring a successful Prudential Capital Assessment Review (PCAR) exercise that will contribute to the resolution of financial difficulties in credit institutions. Until such time as those difficulties are resolved, the Bank will continue its crisis-related work, including providing standard and non-standard liquidity assistance against adequate collateral. Recovery and resolution systems for banks and credit unions will also be developed. At the summit held in October 2012, EU leaders agreed to proceed with work on the legislative proposals on the SSM as a priority with the objective of agreeing the framework by 1 January Work on the operational implementation will take place in the course of There has been significant progress in enhancing and developing the supervisory model over recent years. This has come about through the provision of new statutory powers to the Bank and the development of a supervisory approach which is assertive and risk-based. Additional statutory powers which are due to be assigned will further strengthen the Bank s ability to regulate financial services providers and to enforce sanctions for breaches in regulation. 5 Strategic Plan

8 Regulatory Approach It is vital that the Bank does whatever is necessary to protect consumers and prevent failures that threaten the Irish financial system. The Irish authorities have taken decisive steps to strengthen the banking system through rigorous, conservative and independent assessments of loan losses involving recapitalisation actions and targeted reduction of non-core assets. Significant efforts have also been made to improve regulation, including a strengthened legal mandate. The Bank has, as a priority, targeted improved standards of governance and fitness and probity across financial services in Ireland. The Bank s Corporate Governance for Credit Institutions and Insurance Undertakings sets out clear requirements for the directors and boards of banks and insurance companies. While these requirements may be more onerous than those in place in other jurisdictions, they set an appropriate benchmark. The statutory Fitness and Probity Standards strengthen the Bank s gatekeeper role in relation to senior appointments and allow, where appropriate, the suspension or removal of an individual from a regulated firm. The enactment of the Central Bank (Supervision and Enforcement) Bill, 2011 (due in 2013) will be a key tool in enhancing pro-active supervision and will strengthen the Bank s powers of enforcement. The Bill includes new powers to impose directions on credit and financial institutions, widens the existing range of powers for authorised officers and will increase the current level of administrative sanctions penalties. The Bill also provides for protections for whistle blowers and strengthens the Bank s ability to provide assistance to overseas supervisors. In line with these enhanced supervisory powers the Bank will establish an Implementation Advisory Committee to facilitate consultation on the detailed implementation of the Bill s provisions. The Bank will also develop an operational framework for whistle blowers and put in place a redress and restitution scheme. The Bank has adopted a risk-based approach to supervision underpinned by a credible enforcement deterrent. The new Probability Risk Impact Supervisory System (PRISM) represents a challenging and proportionate risk-based system of supervision for all financial institutions operating in Ireland. Initially applied to banks and insurers in 2011, in 2012 PRISM was extended to investment firms and credit unions and will be used in support of focused thematic inspection work across a significant number of firms. PRISM - New Approach to Firm Supervision PRISM is the Bank s new framework for the supervision of regulated firms. It is both a new engagement model and a tool to facilitate detailed probability risk assessment. PRISM provides supervisors with guidance on the level of required engagement with a particular firm and a means to document their actions and judgements. PRISM requires supervisors to form judgements about the risks each firm presents and then to develop appropriate risk mitigation programmes to reduce unacceptable risks to an acceptable level. Under PRISM, the most significant firms - those having the greatest impact on financial stability and the consumer - receive the highest level of supervision under structured engagement plans, leading to early interventions to mitigate potential risks. Conversely, those firms which have the lowest potential adverse impact are supervised reactively or through thematic assessments, with the Bank taking targeted enforcement action against firms across all impact categories whose actions affect the achievement of statutory objectives including financial stability and consumer protection. Firms likely to have the greatest impact on financial stability or the consumer will receive the highest level of supervision. The Bank will also continue to develop a PRISM strategy for low impact firms focusing on reactive management of this category of firms. A programme to integrate on-line returns from low impact firms and automate data analysis to replace manual reviewing of on-line returns will be developed. In 2013, PRISM will be reviewed in the context of its operation and EU developments. Themed reviews and inspections of firms in every category remain an important priority for the Bank and are an important element of the Bank s supervision strategy. Publishing the outcomes of inspections allows external parties to evaluate and judge the work being carried out. Another key focus of the Bank over this strategic period will be the restructuring and resolution of the credit union sector. Part III of the Central Bank Reform Act 2010, which provides the Bank with Central Bank of Ireland 6

9 the powers to set out regulations and standards of fitness and probity for regulated entities will commence for credit unions. In addition, under PRISM, the Bank will be in a position to challenge credit unions robustly where experience and analysis would suggest that certain key underlying assumptions driving plans or underpinning current business models appear unrealistic and seek the necessary changes as appropriate. The Bank s Enforcement Strategy will help to deliver a regulatory regime that is credible and effective. The forthcoming enactment of the Central Bank (Supervision and Enforcement) Bill 2011 will also reinforce the powers of the Bank in the context of regulation setting, proactive supervision and enforcement. The Bill includes a single wide ranging power of direction, wider powers for authorised officers, the ability to require skilled persons reports and increased administrative sanctions penalties. More broadly, it proposes protections for whistle blowers and will strengthen the Bank s ability to provide assistance to overseas supervisors. Resolution of Credit Institutions One of the Bank s statutory objectives is the resolution of the financial difficulties in credit institutions in Ireland. The Financial Measures Programme (FMP) Report, published in March 2011, included details of the outcomes of rigorous solvency stress tests, funding assessments and the resulting restructuring, recapitalisation and deleveraging requirements of the Covered Institutions. 2 The down-sizing of the banks balance sheets is progressing through the sale of non-core assets. The core business of the banks is being supported through the provision of capital to support new lending. Addressing Consumer Challenges Working to protect the interests of consumers of financial services remains a key priority. A review of the Bank s Consumer Protection Strategy was completed in 2012 to ensure that the strategy has the right focus for consumers now and into the future. This review incorporated engagement with external stakeholders, including the statutory Consumer Advisory Group and other consumer groups. Consumer Protection The 5 Cs The Bank s Consumer Protection Strategy is based on the 5 Cs framework Consumer - is at the centre of the Bank s focus Confidence working to help consumers have confidence in financial services, products and regulation Compliance monitoring and enforcing compliance with consumer protection rules Challenge being prepared to challenge firms and ourselves to get a better outcome for consumers and Culture promoting a consumer focused approach to the provision of financial services Focussing on mortgage arrears and its impact on consumers will continue to be an immediate and important priority for the Bank which will continue to drive reform in this area. Lenders will be required to demonstrate that they are developing and rolling-out strategies and methods which deliver longer-term sustainable solutions under their Mortgage Arrears Resolution Strategies (MARS). This will include monitoring the level of dedicated resources and skills in the banks in relevant areas and demanding early intervention by the banks on pre-arrears cases. The Bank will continue to closely monitor progress on this front. The Bank will also continue to work with financial institutions to encourage them to focus on strengthening systems to manage and resolve distressed home mortgage and Small and Medium Enterprises (SME) loans. Protections that exist for borrowers will also be reviewed, by inspecting banks compliance with the Code of Conduct on Mortgage Arrears (CCMA). 2 AIB, Bank of Ireland and Permanent TSB. 7 Strategic Plan

10 The proposed Personal Insolvency legislation provides for the establishment of a new infrastructure to address debt-management issues. The new legislation will amend the Bankruptcy Act 1988, and provide for the establishment of the Insolvency Service of Ireland. The main objective of the proposed legislation is to address the need to help consumers discharge their debts due to insolvency, without recourse to bankruptcy, and thereby lessen the adverse consequences for economic activity in the State. The Bank will encourage lenders to engage with consumers to bring early resolution to unsustainable debts. The Bank has put in place a number of codes of conduct to provide protection for consumers. These include: The Consumer Protection Code which governs how banks, insurance companies and intermediaries deal with their customers. The Minimum Competency Code which established minimum professional standards for financial services providers, with particular emphasis on areas dealing with consumers. The Licensed Moneylenders Code which applies to moneylenders licensed under law. Codes of Conduct on Mortgage Arrears - which set out how mortgage lenders must treat borrowers in or facing mortgage arrears; Switching Current Accounts applies where a consumer is switching a current account held with a credit institution, to a current account with another credit institution; and where a consumer is switching the active direct debits and standing orders on a current account to another existing current account with a different credit institution; and Authority (ESA) committees and contributing to changes to a number of European Directives including Markets in Financial Instruments Directive (MiFID) and the Insurance Mediation Directive. Monitoring and enforcing compliance with these rules is a priority for the Bank to ensure that consumers are being treated fairly. The Bank will achieve this primarily by carrying out themed reviews and inspections on particular risks emerging in the different sectors. A list of themed inspections to be undertaken will be published early in Economic Advice and Policy Development The Bank plays an important role in influencing national economic policy, by acting as an independent and authoritative commentator on the economy and as advisor to the government on policy initiatives. This role is performed through the provision of economic analysis, research and financial statistics. Given the weakness of, and imbalances in the Irish economy, as well as the requirements for reform emanating from the EU-IMF Programme, the Bank s role as provider of independent economic advice and financial statistics has become even more important. The Bank has already undertaken reforms to meet these challenges including changing its structures and resourcing to improve the delivery of policyrelevant analysis and research. Together with the Economic and Social Research Institute (ESRI), the Bank is commencing a major project to build models of the Irish economy. The objectives are to enable better analysis and forecasts of the medium term evolution of the Irish economy and to enhance the breadth and quality of economic advice to the government. Lending to SMEs sets out the processes regulated entities are required to adopt in facilitating access to credit for SMEs. In addition, there are a number of European Directives that provide protections for consumers in the areas of investment services, consumer credit and payment services. The Bank will continue to enhance the domestic framework by completing a review of the Mortgage Arrears and Switching Codes as well as developing a new code for debt management/bill payment companies. The Bank will also continue to work on helping to shape the consumer protection agenda at European level by participating in a number of European Supervisory Central Bank of Ireland 8

11 Joint Central Bank/ESRI Macro Economic Model In the wake of the property crash and weakness of the financial system, and the onerous level of both private and public sector debt, understanding how the economy will evolve in the medium term and how policy actions can aid recovery are of paramount importance. The global financial crisis has exposed the failings of standard macro-economic models, due to, in part, an inadequate modelling of the relationship between the real and financial sectors of the economy. Models of the Irish economy have suffered a similar fate. In addition, it has been difficult in an economy the size of Ireland for one institution to commit sufficient resources in terms of highly specialist staff with regard to evolving and maintaining such models. In light of this, the Bank and the ESRI have agreed to collaborate jointly to develop a suite of modern macro-economic/econometric models of the Irish economy as a basis for informing macro-economic, monetary, financial sector and fiscal policy decisions. This project will last three years and will involve a number of researchers drawn from both institutions collaborating in developing a new generation of models of the economy which are suitable for policy analysis. This project is of critical importance to both organisations, particularly in light of the current challenges and will be of significant benefit to domestic policymakers. In the coming period there will be more engagement with the wider economic community to reinforce the Bank s advisory role. Communication of economic policies and analysis to policy-makers and society in general will be enhanced to reach as wide an audience as possible. This will include the Economic Letters series, designed to address topical policy issues and the publication of the Quarterly Bulletin. The Bank is continuing to build on its capacity to carry out macro-prudential analysis for the Irish economy. This commenced in 2012 with the publication of the Bank s first Macro-Financial Review. In the European context, the Bank continues to respond to the evolving economic and monetary environment by providing advice and analysis to the Governor in his capacity as a member of the Governing Council of the ECB, and contributing to policy development at many Eurosystem committees on issues including: the challenges to monetary policy setting when nominal interest rates reach very low levels; assessing and improving the functioning of the monetary transmission mechanism; implications of financial market instability on the real economy; implications of the design and implementation of non-standard monetary policy measures; and econometric modelling and forecasting of Eurosystem economic growth and inflation. Statistics The Bank is the key compiler of financial sector statistics in Ireland and works closely with the Central Statistics Office (CSO) in developing this statistical framework. The compilation of statistics has two main purposes: providing key information for domestic policymakers and for the compilation of Ireland s macro-economic statistics; and meeting the Bank s reporting obligations to the ECB and other international organisations. Demand for statistics has increased significantly in recent years and this trend will continue over the lifetime of this Plan. At European level, there are enhanced data requirements from the European Systemic Risk Board (ESRB) and the EC to assist in their surveillance of macro-economic and macro-prudential imbalances. At a global level there is a need to improve existing data to respond to new challenges, particularly to support financial stability analysis. Data gaps 3 that have been identified include the lack of information on the interconnectedness of financial institutions and the activities of shadow banking entities. On the domestic front new statistics are required to monitor compliance with the EU-IMF Programme. Over the lifetime of this Plan these developments will result in a significant increase in the Bank s role as compiler and researcher of, and commentator on, monetary and financial statistics key data gaps were identified in the report of the IMF and Financial Stability Board to the G20 Finance Ministers and Central Bank Governors. 9 Strategic Plan

12 Payments Systems and Currency Services The Bank is responsible for oversight and operational elements of payment and settlement systems. In view of the importance of these systems to economic activity through their role in facilitating fast and low-risk transactions, the Bank will seek to ensure that the systems are safe, effective and efficient and that access to the systems is not restricted. The Bank is leading the development and implementation of a National Payments Plan (NPP) and is working with the financial sector to prepare for a new system to support the Deposit Guarantee Scheme (DGS). Payments Oversight Role A primary function of the Bank s Payments Oversight role is to ensure the safety and efficiency of Irish retail payment systems. The Bank will continue to carry out its payments oversight role through involvement and engagement, via board representation, in projects relating to changes in the delivery of payments services. At Eurosystem level the Bank s responsibilities will continue to include contributing towards a harmonised approach to payments oversight activities across the euro area. TARGET2 4 is the single pan-european system used by each of the national payment systems to ensure a uniform wholesale payment infrastructure, thus promoting further efficiency and integration in European financial markets. At the request of the government, the Bank is taking a lead role in the development and implementation of a NPP, which aims to increase the level of electronic payments in the economy and increase payments efficiency generally. The Plan is expected to be implemented over a three year period. Currency Services The Bank will continue its role in the national cash cycle and continue to liaise with the retail banks to ensure the currency system is efficient, secure and resilient and at the same time meets the needs of the retail sector and the public. The strategy for banknote and coin supply and production will be reviewed as the Eurosystem moves towards the introduction of a second series of banknotes. Regulatory Developments in Europe It is essential that the Bank continues to exercise influence within the ECB, the ESRB and the new ESAs through strengthening of its advocacy and quality of analysis. There is now a clear path towards integrated banking supervision with ultimate authority at the European level enforcing a common rule book. A significant national component of supervisory activity is likely to continue. Extensive cross-border use of national supervisory capacity will likely be an integral part of supervision in the years ahead. The other two elements of the proposed Banking Union namely the establishment of a European bank resolution scheme fund and a European deposit insurance scheme, could help break the damaging link between bank failure in smaller member states and the taxpayer burden in those member states. In particular, centralised resolution would ensure that what happened in Ireland would not be repeated either here or in the European Union in the future. Deposit Guarantee Scheme (DGS) The Bank is responsible for the administration of the DGS. This Scheme, which will compensate depositors up to certain limits - in the event of failure of a credit institution, is an important element in the financial stability toolkit. It reduces the potential of depositors losing confidence that they will recoup their deposits if institutions experience difficulties. The Bank continues to work with all credit institutions to prepare for and implement new requirements arising from a draft EU Directive on Deposit Guarantee Schemes which is expected to come into effect on 1 January TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system. Central Bank of Ireland 10

13 Single Supervisory Mechanism (SSM) At the EU Summit on 18 October 2012, the 27 heads of state and the EU agreed on steps needed to complete Europe s Economic and Monetary Union to ensure economic and social welfare as well as stability and sustained prosperity. The Summit agreed on the need to move towards an integrated financial framework. One of the main components of the framework is the establishment of an SSM. The SSM will be based on the highest standards for bank supervision and will allow the ECB to carry out direct supervision. The establishment of a single rule book underpinning centralised supervision will be of paramount importance in the new supervisory regime. The intention is to break the link between sovereign risk and banks, thereby strengthening confidence and allaying concerns regarding the future of the euro. Consultations will continue between the European Central Bank, the European Council, the European Parliament and Member States during 2013 on the legislative and operational framework. The SSM also provides for the adoption of provisions relating to the harmonization of national deposit guarantee schemes. It is too early to say what the impact might be on national banking supervisory regimes. While it is expected that there would be some centralisation of functions and decision making at the ECB, the scale and timing of this remains to be decided. However, the Bank will adapt its national position in line with any change in the European context. Organisational Change The aftermath of the financial crisis in Ireland has had a major impact on how the Bank operates. In the last three years, the Bank has undergone significant change both in terms of its broadened mandate, its structures and resourcing. There has also been a significant growth in staff numbers leading to the establishment of new directorates and divisions. The Bank will continue to review internal governance arrangements to ensure the appropriate internal structure, resources and organisational capability to achieve its strategic goals. While the recent period of change has been particularly challenging, the Bank is now entering a phase of consolidation. The high growth in staff numbers is projected to stabilise for the future. The Bank will continue to assess processes and cost effectiveness within the organisation to maximise operational effectiveness. Enabling strategies for human resources, premises, IT systems and online receipt of regulatory information have been formulated to give focus to the efficiency. As the primary source of income for the Bank is the return on its investment assets, the Bank will review the strategic asset allocation to ensure an appropriate balance of return and risk. As a result, the Bank is enhancing its risk management framework in order to mitigate the significant financial and non-financial risks arising in its activities and operations and also to effectively implement Eurosystem requirements. In recent times the Bank has been heavily engaged in various high-profile activities such as the FMP, the roll-out of enhancements in regulatory functions, and the evolving activities at Eurosystem level regarding monetary policy development and implementation and crisis resolution measures. 11 Strategic Plan

14 Legislative Environment Since the establishment of the Bank as a single fully integrated structure under the Central Bank Reform Act, 2010, the Bank has worked with the Government and legislators to enhance the existing powers of the Bank and to develop new powers where legislative weaknesses have been identified. A short summary of legislation enacted following the Central Bank Reform Act, 2010, and pending legislation follows. Central Bank and Credit Institutions (Resolution) Act, 2011 The Central Bank and Credit Institutions (Resolution) Act, 2011, gave additional powers to the Bank to resolve individual credit institutions, including credit unions. Some of the key powers granted to the Bank under the Act are as follows: The establishment of the Credit Institutions Resolution Fund to provide a source of funds for the resolution of financially unstable credit institutions. The fund will be financed by contributions from authorised credit institutions and the Minister for Finance. Credit Reporting Bill, 2012 The publication of the Credit Reporting Bill, 2012 is one of the State s obligations under the EU-IMF Programme. The Bill provides for the establishment of a comprehensive and mandatory credit reporting and credit checking system (Central Credit Register). The Central Credit Register will be operated by the Bank and will allow lenders access to accurate and up to date information regarding a borrower s total exposure. This information will support lenders in making informed credit decisions and will also be an important source of data for the Bank for prudential supervision, statistical or associated purposes. Implementation Advisory Committee In line with these enhanced supervisory powers the Bank will establish an Implementation Advisory Committee and will initiate a programme of review of regulatory powers to ensure optimal use of the new legislation. The Bank will also develop an operational framework for whistle blowers and a put in place a redress and restitution scheme. The power to establish a bridge bank as a limited company, owned by the Bank and created for the purposes of holding assets or liabilities transferred from a distressed institution. The Bank may apply to the High Court for a Transfer Order under which it can compel a distressed credit institution to transfer its assets and liabilities to another entity. The Bank may apply to the High Court to appoint a Special Manager to a credit institution to take over the management of the credit institution and operate it within defined terms. Central Bank (Supervision and Enforcement) Bill, 2011 The enactment of the Central Bank (Supervision and Enforcement) Bill, 2011 is due in 2013 and will be key to strengthening the Bank s powers of enforcement. The Bill includes new powers to impose directions on credit and financial institutions, widens the existing range of powers for authorised officers and will increase the current level of administrative sanctions penalties. The Bill also provides for protections for whistle blowers and strengthens the Bank s ability to provide assistance to overseas supervisors. Central Bank of Ireland 12

15 HIGH LEVEL GOALS

16 HIGH LEVEL GOALS Main strategic deliverables at a glance Eurosystem effectiveness and price stability Stability of the Financial System Proper and effective regulation of financial institutions and markets Support the Governor in his role in the Eurosystem Significant input at ECB level Implementation of Eurosystem operations Assist in resolving crisis Macro-prudential analysis and policy EU-IMF Programme Ensure liquidity for banks Assertive risk-based supervision PRISM Improve supervisory quality Credible enforcement Strong powers EU Agenda Resolution of financial difficulties in credit institutions PCAR in 2013 Bank s policy for resolution of credit unions Embed the recovery and resolution plans in the banks Enhance internal Loan Loss Forecasting Protection of consumers of financial services Strengthen Consumer Protection Framework Mortgage Arrears Fair treatment of consumers Engagement with key stakeholders Independent economic advice and high quality financial statistics Increase volume and quality of analysis Improve communication of the policies and views of the Bank Increased engagement with Economics Community Efficient and effective Payment and Settlement Systems and Currency Services Payment and Securities Settlement Systems Policies Local Collateral Management Solution Deposit Guarantee Scheme National Payments Plan ES2 Bank s role in Cash Cycle Operational efficiency and cost effectiveness Corporate Governance Management of Change Enabling Strategies of HR/IT/premises Investment Strategy Communications Management of Risk Internal Controls Central Bank of Ireland 14

17 HIGH LEVEL GOALS The eight high level goals set out in this chapter are derived from the Bank s current and pending statutory objectives and responsibilities. They also reflect the Bank s role and responsibilities within the EU and as a member of the Eurosystem. The actions and goals are, in some areas, a continuation of the work commenced under the Strategic Plan and also reflect our commitments under the EU-IMF Programme. In addition, the Bank recognises that how the staff work is also crucial to the achievement of these goals and details of how our operational efficiency and effectiveness will be increased is also included in the Plan. The high level goals are summarised as follows: 1. Eurosystem Effectiveness and Price Stability The Bank is responsible for maintaining price stability through monetary policy formulation at Eurosystem level. We will continue to support the Governor in performing his role in relation to ECB monetary policy formulation and crisis resolution, and also continue to contribute to policy development and analysis across our wide range of Eurosystem commitments. The Bank will continue to implement both standard and non-standard monetary policies and operations on a decentralised basis. 2. Stability of the Financial System Financial stability in Ireland and across the euro area remains a key priority for the Bank. In addition to the provision of liquidity, the analysis of the financial environment with particular focus on risks and vulnerabilities will continue to be used to inform policy makers. Specific projects will be undertaken to build up data analytics and loan-loss forecasting capability. 3. Proper and effective regulation of financial institutions and markets Regulation of institutions and markets will be undertaken through assertive risk-based supervision which is underpinned by credible enforcement deterrents. Specific initiatives will be implemented in the different sectors regulated by the Bank. 4. Resolution of financial difficulties in credit institutions In the effort to bring about sustained economic recovery in Ireland, embedding recovery and resolution plans in banks, credit unions and other financial institutions is vital. Stress-testing of institutions will also continue to ensure that they have adequate capital to fulfil their capital adequacy requirements. 5. Protection of consumers of financial services Consumer protection strategic priorities have been identified which aim to strengthen and maintain protection for consumers, so that financial services work in the best interests of consumers both at the present time and in the future. 6. Independent economic advice and high quality financial statistics Increasing the quality and relevance of economic analysis, research and financial statistics will assist the provision of assessments and advice on domestic economic related issues for policymakers, the media, the public and the markets. The Bank will also continue to contribute advice and analysis at EU, Eurosystem and EC-IMF- ECB levels. 7. Efficient and effective payment and settlement systems and currency services The Bank s role in the operations and oversight of payment and securities settlement systems is aimed principally at ensuring that they are safe, resilient, efficient and effective and that access to such systems is not restricted. Currency services will continue to be provided to the public while at the same time the Bank will lead the development of the National Payments Plan. 8. Operational efficiency and cost effectiveness Efficiency and cost effectiveness will underpin all our operations. The Bank will strive to have the people, systems and structures in place to maximise our effectiveness. Cost control within our own operations and ensuring the optimum return on the Bank s investment portfolio will be key considerations in our financial and planning processes. Our operations will also be conducted within well-defined risk management and control frameworks. 15 Strategic Plan

18 HIGH LEVEL GOAL 1 EUROSYSTEM EFFECTIVENESS AND PRICE STABILITY The Bank is responsible for maintaining price stability in Ireland through the implementation of ECB decisions on monetary policy. As a member of the ECB Governing Council, the Governor has direct input into the decisions on monetary policy, the measures being taken by the Eurosystem to deal with the ongoing tensions in financial markets, and on enhancing institutional frameworks to help facilitate a return to normal market functioning. The heterogeneous impact of the financial and euro area sovereign debt crises on euro area countries transmission mechanisms will also require on-going monitoring and analysis. The Bank will continue to meet Eurosystem needs in terms of operationalising policy measures and providing analysis of the impact of such measures on financial market functioning. This will require the Bank to: develop additional expertise on key monetary policy issues in a rapidly-changing and uncertain environment; continuously improve the quality and depth of the analysis available to the Governor and other members of senior management on these issues; and influence policy across the range of Eurosystem and EU committees, on issues including monetary policy design and implementation, financial market developments, collateral eligibility and risk management. The implementation of monetary policy decisions will continue on a decentralised basis. We will continue to liaise closely with counterparties in the domestic market to ensure the successful provision of liquidity, against adequate collateral, in our Eurosystem open market operations. The Bank will also continue to contribute to the design of the system in order to determine the various channels through which these measures affect variables such as economic output and inflation, to make the monetary transmission mechanism more effective. We will implement non-standard measures, both Eurosystem and domestic, while ensuring that risk management of these measures is appropriate. We will provide input at Eurosystem and wider EU policy level to allow banks to restructure/ deleverage and ultimately reduce their reliance on Eurosystem funding. The Eurosystem s Collateral Framework All Eurosystem liquidity providing operations are based on adequate collateral which meets high credit standards. To protect the Eurosystem from incurring losses, all collateral must fulfil certain eligibility criteria and, if deemed eligible, the collateral assets are added to the ECB s Eligible Assets Database (EADB) and eligible counterparties throughout the Eurosystem can use them as collateral in subsequent operations. The eligible assets are subject to risk control measures, which are broadly harmonised across the euro area to ensure non-discriminatory conditions in different member states. These risk control measures include valuation approaches, haircuts, variation margins (marking to market), and limits in relation to the use of uncovered bank bonds. The Eurosystem s collateral framework is very broad by comparison with other central banks, and reflects differences across member states legal and financial systems. The financial crisis meant that unsecured interbank markets ceased to function normally, so the Eurosystem became an essential liquidity provider to Eurosystem banks; therefore, sufficiency of eligible ECB collateral has become more important for banks over time. As a result, the ECB s Governing Council has taken measures to increase collateral accepted from counterparties, in order to maintain their access to the Eurosystem s liquidity providing operations. These measures include: Central Bank of Ireland 16

19 temporary acceptance of credit claims (i.e. bank loans) that satisfy certain criteria; lowering the credit ratings requirement for asset backed securities (ABS) to ensure they retained eligibility or regained eligibility; acceptance of marketable debt intruments denominated in US Dollar, Sterling and Yen, and issued and held in the euro area; and suspension of the application of the minimum credit rating threshold for marketable debt instruments issued or guaranteed by countries, and credit claims granted to or guaranteed by countries, that are in an EU-IMF Programme. Strategy Action Participate effectively in monetary policy formulation Maintain expertise on key monetary policy issues in a rapidly-changing and uncertain environment Continuously improve the quality and depth of the analysis available to the Governor and other members of senior management Provide effective briefing and policy advice in relation to Eurosystem monetary policy decision making Influence policy at Eurosystem Committees Develop a new best-practice macro-economic model to guide monetary policy Implement Eurosystem measures to address difficulties in financial markets through its non-standard measures Implement Eurosystem operations efficiently Ensure that Irish banks have adequate liquidity to complete the required restructuring/deleveraging set out under the Financial Measures Programme Provide significant input/briefing at Eurosystem policy level to allow the banks to achieve this restructuring/ deleveraging and ultimately reduce their reliance on Eurosystem funding Manage the ECB reserve portfolio effectively»» Ensure that all open market operations are conducted in a timely, efficient and effective manner 17 Strategic Plan