As Published in Central Bank of Ireland,
Quarterly Bulletin, Autumn 1987.
PREFACE
The Central Bank Act, 1971 contains extensive provisions for the licensing and supervision of banks by the Central Bank1. The Bank may, at its discretion, grant or refuse to grant an applicant a licence authorising the holder to carry on banking business. The refusal to grant a licence requires the consent of the Minister for Finance. Unless a person is licensed, or exempted under the terms of the Act, he cannot lawfully, on his own behalf or on behalf of any other person, carry on banking business or hold himself out or represent himself as a banker or as carrying on banking business.
In certain circumstances the Bank may revoke a licence, with the consent of the Minister for Finance. The Act also contains a number of provisions empowering the Bank; to obtain from licence holders information ahout the business to which the licence relates, to carry out on-site inspections, and to regulate the activities of licence holders.
In view of these powers and functions, the Bank thought it desirable to set down standards or criteria which would guide it in the assessment of applications for licences and in the supervision of the business carried on by licence holders.
These Licensing and Supervision Requirements and Standards for Banks were last published in the Bank's Quarterly Bulletin of Autumn 1981. They have now been revised and updated by the Bank having regard to the considerable changes that have taken place in the domestic banking environment in recent years and to international developments in bank regulation since 1981 and are set out in the following pages.
The requirements and standards do not have a direct statutory basis and are applied by the Bank in a flexible manner. They are a frame of reference to be used by the Bank in the exercise of its supervisory functions including, where necessary, the imposition of statutory conditions on licences under Section 10 of the 1971 Act. The various ratios and limits adverted to are prudential in nature and differ from the ratios and limits applied by the Bank for monetary policy and exchange control purposes.
The Bank reserves the right to alter the requirements and standards should this appear necessary or desirable. Subject to prior approval the Bank may permit individual banks to deviate from particular requirements or standards where it considers such deviation to be justified. Their application by the Bank does not relieve the boards and management of licence holders of the responsibility to conduct the affairs of their banks in a prudent manner with full and primary regard for the safety of their depositors' funds.
1. (a) An applicant for a licence from within the EC must be (i) an authorised credit institution2 within the meaning of the EC Banking Directive of Deeember 1977 having separate own funds or (ii) a company constituted under the laws of a member State of the EC and having a legal form acceptable to the Bank.
(b) An applicant for a licence from outside the EC shall, subject to the Bank's approval of the application, incorporate a company in the State to hold the licence. The locally incorporated company must have a legal form acceptable to the Bank, and what is deemed by the Bank; to be an appreciable part of the share capital may be required to be in beneficial Irish ownership. However, subject to the Bank's approval, banking corporations of standing may be permitted to establish on a branch or wholly-owned subsidiary basis.
2. Paid-up share capital of a licence holder incorporated in the State shall be not less than Pound 5,OOO,OOO. (Temporary exemptions will be granted to existing licence holders with lower levels of paid-up share capital.)
3. (a) The Bank must be satisfied that the beneficial ownership and capital structure of a licence holder are such as best to ensure:
(i) the capacity of the licence holder to be independent of dominant personal and commercial interests,
(ii) cohesion in the manner in which the business of the licence holder is directed by its owners,
(iii) a capacity to provide such new capital for the licence holder as may be required in the future,
(b) The Bank would prefer that the ownership of licensed banks should be vested in one or more banks or other financial institutions of standing or alternatively, there should be a wide spread of ownership.
(c) A licence holder shall notify the Bank in advance of the registration of any transfer of shares which would result in the transferee controlling more than 5 per cent. of the voting rights in the licensed bank.
(d) Where a shareholding, registered in the name of a nominee, constitutes more than 5 per cent. of the voting rights in a licensed bank, the ultimate beneficial ownership of shares so held shall be made known to the licence holder who shall make it known to the Bank.
4. The Bank will require from the parent or major shareholder of a banking subsidiary incorporated in the State an undertaking that the subsidiary will be in a position to meet its liabilities for as long as the parent/major shareholder continues to hold the majority of the equity of the subsidiary.
5. (a) A majority of the Board of Directors of licence holders incorporated in the State may be required to be Irish or nationals of other member States of the EC.
(b) Banks established in the State on a branch basis may be required to have a local Supervisory Board and the majority of the members of such Board may be required to be Irish or nationals of other member States of the EC.
6. The business of the licence holder and the management of the day-to-day operations of its offices in the State shall be directed by at least two persons. who shall be resident in the State.
7. The Bank; must be satisfied in regard to the suitability of the management structure of a licensed bank and that there is adequate provision for suitable management succession. In particular, it must be satisfied (a) that executive directors, or executive members of a local supervisory hoard (if any) in the case of a branch of an externally-owned bank, and senior management executives are persons of integrity and have suitable experienee in banking. and (b) that non-executive directors, or non-executive members of any local supervisory board in the case of a branch of an externally-owned bank, are persons of integrity and have suitable relevant experience.
8. (a) No auditor of a licence holder shall act for the bank in any capacity other than that of auditor, consultant or share registrar.
(b) No partner in a firm of auditors shall be auditor of a licence holder if his firm or any partner in it acts for the bank in a capacity other than that of auditor, consultant or share registrar.
9. An applieant for a licence shall satisfy the Bank that it has clearly defined objectives which have heen adequately researched, that it is likely to be commercially successful and that the grant of a licence will bring an appreciable economic benefit to the State. Such an economic benefit could he evidenced by, for example, the introduction of a new banking service, the improvement of an existing banking service, assistance in the development of trade between this country and abroad, or in the attraction of appropriate investment projects to this country.
10. An applicant for a licence shall satisfy the Bank that its objectives are consistent with the aims of economic and monetary pol icy, safety of depositors' funds, prudent banking practice and fair trading in banking.
(1. Cancelled)
2. (a) A holder of a licence shall observe such prudential liquidity ratios as shall be determined by the Bank from time to time.
(b) A holder of a licence shall establish appropriate policies with regard to the management of its liquidity. It shall ensure that adequate internal systems are created to monitor and control maturity mismatches between the bank's assets and liabilities to the satisfaction of the Bank.
3. A holder of a liccnce shall maintain, to the satisfaction of the Bank, appropriate internal control systems for the ongoing control and monitoring of its foreign exchange operations and shall observe such prudential ratios and limits relating to such opcrations as may be prescribed by the Bank from time to time.
4. A holder of a licence shall maintain, to the satisfaction of the Bank, appropriate internal control systems to determine and assess on an ongoing basis the degree of interest rate risk to which the bank is exposed.
5. Where a holder of a licence is involved in a fiduciary capacity in the management of clients' funds it shall ensure, to the satisfaction of the Bank, that the possible risks to the bank arising from such activities are adequately assessed and provided for.
6. A holder of a licence shall ensure, to the satisfaction of the Bank, that appropriate internal reporting, risk assessment and control procedures are established in respect of all off-balance sheet activities.
7. (a) A holder of a licence shall not owe more than 15 per cent. of total deposits to any one interbank depositor or or what is deemed by the Bank to be an associated group of interbank depositors. The ten largest interbank deposits shall not exceed 50 per cent. of total deposits.
(b) A holder of a licence shall not owe more than 5 per cent. of total non-interbank deposits to any one non-interbank depositor or what is deemed by the Bank to be an associated group of non-interbank depositors. The ten largest non-interbank deposits shall not exceed 30 per cent. of total non-interbank deposits.
(c) In general, a holder of a licence shall have a deposit portfolio, including funds taken on the interbank market, which is widely spread.
8. (a) (i) A holder of a licence, incorporated in the State, shall not employ risk assets amounting to more than 40 per cent. of own funds with any one individual non-bank borrower or what is considered by the Bank to be an associated group of non-bank borrowers.
(ii) A licence holder established in the State on a branch basis shall not employ more than 4 per cent. of the risk assets of the branch with any one individual nonbank borrower or what is considercd by the Bank to be an associated group of non-bank borrowers.
(b) (i) The aggregate of a licence holder's risk assets, which are individually in excess of 15 per cent. of own funds, shall not exceed 800 per cent. of own funds.
(ii) The twenty largest risk assets under (a)(ii) above shall not account for more than 80 per cent. of the risk assets of the branch.
(c) A holder of a licence shall notify the Bank on a quarterly basis of any exposure under the heads listed in (a) amounting to more than half of the percentages specified.
(d) A licence holder shall establish appropriate internal management systems to monitor and control the level of sovereign risk.
9. (a) A holder of a licence, incorporated in the State, shall not have risk assets amounting to more than 200 per cent. of own funds concentraded in any one sector of business or economic activity which is subject to a common predominant risk factor; where a common risk could be considered to apply to two or more separate sectors (as, for example, the property development and building sectors) not more than 250 per cent. of own funds shall be employed with them in aggregate.
(b) A holder of a licence established in the State on a branch basis shall not have more than 20 per cent. of risk assets concentrated in any one sector of business or economic activity which is subject to a common predominant risk factor; where a common risk could be considered to apply to two or more separate sectors (as, for example, the property development and building sectors) not more than 25 per cent. of total risk assets shall be employed with them in aggregate.
10. (a) A holder of a licence shall not acquire more than 20 per cent. of the voting rights in another company without the written approval of the Bank. Furthermore it shall notify the Bank of its divestment of the whole or part of such holdings.
(b) (i) In the case of a bank incorporated in the State the aggregate of risk assets employed with financial businesses, in which the licence holder has what is considered by the Bank to be a major interest4, shall not exceed 200 per cent. of its own funds.
(ii) In the case of a bank established in the State on a branch basis the aggregate of risk assets employed with financial businesses, in which the licence holder has what is considered by the Bank to be a major interest, shall not exceed 20 per cent. of its risk assets.
(c) (i) A holder of a licence incorporated in the State shall not employ risk assets amounting to more than 10 per cent. of its own funds with any one non-financial business in which it has what is considered by the Bank to be a major interest. The aggregate of risk assets employed
4. Beneficial ownership of 20 per cent. or more of the equity of a business together with membership of the Board, if incorporated, would be considered by the Bank to be a major interest.
with such businesses shall not exceed 30 per cent. of own funds of the licence holder.
(ii) A holder of a licence established on a branch basis shall not employ more than 1 per cent. of its risk assets with any one non-financial business in which it has what is considered by the Bank to be a major interest. The aggregate of risk assets employed with such businesses shall not exceed 3 per cent. of risk assets of the licence holder.
11. (a) A licence holder shall not employ risk assets amounting to more than 2 per cent. in aggregate of its own funds with any one of its directors or with any one of its significant shareholders5 including, in either case, funds employed with businesses in which the director or significant shareholder has a major interest, as defined.
(b) The aggregate of all risk assets to which the foregoing requirement applies shall not exceed 10 per cent. of own funds. (c) A holder of a licence shall at the end of each quarter notify the Bank of all loans or other accommodation to which the foregoing requirement applies.
12. A holder of a licence shall not grant an advance or credit facility to its auditor nor to any other individual, group of individuals, or company, which acts as agent for the bank in a capacity where a conflict ot interest could arise.
13. A holder of a licence shall not grant an advance, Ioan or other facility against the security of its own shares or the shares of any subsidiary, fellow subsidiary, or parent company unless such shares are quoted on a Stock Exchange.
14. (a) The prior approval of the Bank shall be required:
(i) in respect of the establishment by any licence holder of a new branch or representative office in the State.
5. A significant shareholder is defined as one who holds 10 per cent. or more of the shares of any class.
ii) in respect of the establishment by a licence holder incorporated in the State of a new branch or representative office outside the State.
(h) Prior notification shall be given to the Bank:
i) in respect of the closure by any licence holder of a branch or representative office in the State.
(ii) in respect of the closure by a licence holder incorporated in the State of a branch or representative office outside the State.
(c) A licence holder shall conform to the policy approved from time to time by the Bank in relation to the number and location of any branches, offices, or sub-offices.
15. A holder of a licence shall maintain ; adquate fidelity guarantee insurance for all staff or make appropriate alternative arrangements acceptable to the Bank.
16. A holder of a licence shall ensure that its activities are consistent with the aims of economic and monetary policy, safety of depositors' funds. prudent banking practice and fair trading in banking.
17. A holder of a licence shall be required to satisfy the Bank that appropriate management and internal control systems have been established and are being applied to provide for the efficient and prudent administration of its assets and liabilities. In this respect, it shall be necessary to have in place such committees of directors and management as shall be necessary to ensure that the quality of its assets and liabilities is maintained at a satisfactory level and that the business of the bank is being conducted in a prudent manner.
18. All licence holders will be required to satisfy the Bank, in regard to possible conflicts of interest arising in the conduct of different types of activity under their control, that adequate arrangements have been made to protect the interests of their clients.
PO Box No 559
Dame St. Dublin 2
Telephone (01) 716666
Telex 31401
Fax 716561
There will be two tiers of capital. Tier I will consist of paid-up share capital and disclosed reserves while Tier II will include undisclosed reserves, asset revaluation reserves, general provisions, perpetual capital instruments and subordinated term debt. The total of Tier II elements will be limited to a maximum of 100 per cent. of the total of Tier I elements.
Four basic weightings for assets are being introduced - 0, 20, 50 and 100 per cent. - and will be applied as follows:
Cash and claims on Some A
(effectively OECD countries) governments
and Central Banks 0 %
Claims on Zone A banks 20 %
Loans fully secured by mortgages on
residential property 50 %
Claims on private sector and all other assets 100 %
Off-balance sheet items will also be included in risk assets on a weighted basis in accordance with international practice.
Parties to the Basle agreement are allowed some discretion in the application of the solvency ratio, both in relation to the composition of capital and to the weightings to be applied to various assets. The Bank's policy in relation to the more significant of these issues is as follows:
Asset Revaluation Reserves which have been capitalised will be included in Tier I capital while those which have not been capitalised will be included in Tier II.
General Bad Debt Provisions (i.e., provisions created to cover risks, which although not specifically identified, are present in any portfolio of bank advances) may be included in Tier II capital up to a maximum of 1.25 per cent. of risk assets. Any provision in respect of LDC debt, whether termed "general" of otherwise will be excluded from capital.
While interest rate risk can be present across the whole range of a bank's activities, a particularly important area of concentration for Irish banks rests with holdings of fixed rate government stock and, to a much lesser extent, variable rate government stock. The following weighting will be applied to holdings of government stock, pending the completion of further international studies regarding the measurement of all market position risks.
Weighting
All variable rate government stock and
fixed rate government stock with up to
1 year maturity 0 %
Fixed rate government stocks with residual
maturities of 1 to 5 years 10 %
Fixed rate government stocks with residual
maturities greater than 5 years 20 %
As regards reporting requirements, the first formal return for individual banks (using the new criteria) should be made as at end-January 1990. For consolidated returns, the first such return should be formally made in respect of end-March 1990 and at end quarters thereafter. The Bank will be forwarding a revised copy of the Monthly Bank Return designed to accommodate the calculation of the new ratio. The return form will contain details of the weightings applicable to each risk asset, including off-balance sheet risks.
Following establishment of risk asset measurement of capital the Bank will cease to apply a gearing ratio requirement.
The Bank may wish in the light of future developments to reintroduce a gearing ratio requirement or to make changes in the admissible constituents of capital or in the weightings applicab le to various assets or off-balance sheet items. Adequate advance notice of any such change would be given.
9 June 1989