‘Non-bank’ is a broad term that captures a range of different non-bank financial institutions such as investment funds, money market funds, other financial institutions (OFIs) as well as insurance corporations and pension funds. These non-bank financial institutions have a range of different business models and are engaged in different activities and economic functions.
The risks or vulnerabilities of the non-bank sector for the global financial system are outlined annually by the European Systemic Risk Board and the Financial Stability Board in their monitoring reports. The IMF and other international financial organisations have also written on such matters and my officials as well as those in the Central Bank of Ireland carefully consider such views when issued.
In terms of the exposure of the Irish financial system to the non-bank sector, while the Irish funds sector has been the leading driver of growth in the overall financial system in Ireland, these funds have limited links to the Irish banking system. They do, however, have significant interlinkages with the OFI sector in Ireland, some of which are non-bank lenders engaged in lending to the domestic Irish economy. The OFI sector has more sizable linkages with the Irish banking sector; as at end-2020, the OFI sector held deposits in domestic banks equivalent to approx. 7 percent of total bank deposits.
The largest component of the Irish-domiciled non-bank sector consists of funds, such as investment funds and money market funds. Subject to their structure and activities, these funds may be subject to an extensive set of EU rules in the form of the Undertakings for Collective Investment in Transferable Securities Directive, the Alternative Investment Fund Managers Directive and the Money Market Fund Regulation. These are supplemented by domestic Irish requirements under Central Bank regulations and rules. In 2021, the European Commission brought forward legislative proposals to improve the functioning of the EU investment funds framework. Once implemented, it is anticipated that these amending measures will strengthen the resilience of investment funds throughout the European Union as well as the ability of regulators such as the Central Bank of Ireland to monitor and enforce compliance with the rules.
In other segments of the non-bank sector, the Central Bank has introduced reporting requirements to monitor developments. For example, Irish-resident Section 110 companies are obliged to report quarterly statistical data to the Central Bank under Section 18 of the Central Bank Act 1971. While these entities are not authorised by the Central Bank they are subject to various regulatory requirements, dependent on the nature of their activities. The Central Bank is responsible for monitoring and enforcing compliance with such regulations.
Non-bank financial institutions carrying out ‘Schedule 2 activities’ under the Criminal Justice (Money Laundering and Terrorist Financing), (Amendment) Act 2010 are subject to supervision by the Central Bank for Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) purposes. Schedule 2 firms are subject to the Central Bank’s minimum engagement model and are supervised in accordance with this model. During the course of this supervision, where weaknesses in the AML/CFT frameworks are identified in Schedule 2 firms, the supervisors issue findings that the Schedule 2 firms are required to implement.
Non-bank financial institutions such as Irish-resident Section 110 companies may also be required to publish a prospectus under the EU Prospectus Regulation and will be subject to regulatory requirements in respect of their derivative activities (under the EU Regulation known as “EMIR”).
The Department of Finance and the Central Bank of Ireland are cognisant of the need to ensure resilience in the non-bank sector. Examples of action taken to ensure resilience in specific parts of the non-bank sector include the introduction of new macroprudential measures for Irish property funds by the Central Bank. The Central Bank was the first European authority to introduce macro-prudential measures for the investment fund sector via an empowerment under EU funds legislation (the Alternative Investment Fund Managers Directive).
In addition, on 6 April, I published the terms of reference for the Department of Finance to conduct a review of Ireland’s funds sector. The review will seek to ensure that Ireland maintains its leading position in asset management and funds servicing and that we continue to see support for our national and regional economies. The review will also seek to ensure that Ireland’s funds sector framework is resilient, future-proofed, supportive of financial stability and a continued example of international best practice. The multi-disciplinary Review Team will be led by the Department of Finance, with support from state bodies, including Revenue and the Central Bank of Ireland, and will conclude its work in summer 2024.
My officials and I continue to engage with the Central Bank on these important issues and such matters have been discussed at the Financial Stability Group. The FSG is a group chaired by the Secretary General of my Department and is made up of the senior leadership of the Central Bank of Ireland and the NTMA). The Department of Finance and the Central Bank of Ireland also continue to actively participate in multiple EU and international fora to address the risks posed by non-banks, reflecting the global nature of capital markets.
