No desks. No staff. No tax. Ireland’s shadow banks
Ireland’s unregulated and barely visible ‘shadow banking’ industry is 10 times the size of our GNP. Is it a benefit or a threat to the economy?
But Stewart warns that the much wider world of shadow banking carries risks. He says financial products played such a direct role in the financial crisis that we should be wary about seeking to attract more of this industry to Ireland.
Bear Sterns, whose collapse in 2008 heralded the beginning of the financial crisis, had several investment vehicles listed in Ireland, with gross assets at one point valued at close to €50 billion. Lehman Brothers, too, had debt securities, with €20 billion issued, along with funds administered from Dublin and quoted on the Irish stock exchange.
The largest and potentially most serious losses occurred at Depfa Bank, an Irish-registered bank, located in the IFSC, that became a subsidiary of Hypo Real Estate in 2007. Losses at these banks required billions in state aid from the German government. It has been reported that it led to a request from the German government to the Irish Government to assist in the bailout of Depfa Bank.
With so much money, and given the role shadow banking played in the financial crisis, many assume this is now a tightly regulated area. But financial-vehicle corporations are not regulated by the Central Bank of Ireland. It says its role is to regulate firms rather than specific financial products. It started keeping figures on the number of these vehicles based in Ireland only from 2008 onwards. Today, a total of two employees in the Central Bank oversee the industry.
Next Tuesday’s meeting of finance ministers appears to be one step in a much longer-term EU-wide bid to tackle aggressive tax planning. It’s unclear at this stage what impact, if any, these moves will have on Ireland. Initial indications are that it is unlikely to focus heavily on so-called shadow banking, at least for now.
The financial-services industry says that because the clampdown is on tax havens and tax evasion, it has nothing to worry about. “None of the measures identified in the action plan are likely to have a significant impact on Ireland,” says Fergal O’Brien of Ibec. He reiterates that Ireland’s network of treaties with other jurisdictions means that it operates a simple and transparent corporation-tax system. “The European Commission is predominantly targeting tax evasion in its work at both the business and personal level.”
On the issue of companies being able to trim their tax bills well below corporation-tax rates, O’Brien says there are many legitimate reasons companies are able to do so. Tackling tax evasion, on the other hand, requires an international response.
“There are various reasons some companies might pay an effective rate which is lower than the headline rate: allowances for research and development investment or timing issues. The globalised nature of modern businesses and their presence in multiple tax jurisdictions also clearly complicates tax systems.
“Tax evasion must be fought on a co-ordinated basis by governments, and it is positive to see that both the EU Commission and the OECD have recently placed more attention on the issue. Tax evasion of any form is totally unacceptable.”
Erosion of tax
It remains to be seen just how the EU’s attempts to tackle the erosion of tax will affect Ireland.
What is clear is that European governments, at a time of austerity, are less likely to put up with potential tax revenue being shifted outside their jurisdictions.
“Let’s remember what the battle against tax evasion is really about,” Algirdas Semeta, the European Commissioner for taxation, said recently. “It’s about protecting the fairness of our tax systems, so honest taxpayers don’t pay for the deeds of the dishonest. It’s about protecting our competitiveness, so that our free markets and open economies are not left vulnerable to abuse.
“The tide has turned towards greater information exchange,” and tax evaders “must know that this current is too strong to swim against.”
Shadow banking: A glossary
Shadow banking: Generally describes nonbank entities involved in the creation of credit across the global financial system. They tend not to be subject to regulatory oversight. Regulators are worried about the role they played in the financial crisis.
Financial-vehicle corporation: A company can use such a vehicle to finance a large project without putting the entire firm at risk. Accounting loopholes means they are often a way for large firms to hide debt, so it looks as if a company doesn’t have a liability when, really, it does.
Hedge funds: These are aggressively managed pools of assets that use a variety of investment strategies to make money. They play a big role in debt markets. Globally, they are largely unregulated, causing concern that they could destabilise bank lenders.
Securitisation: This involves the pooling of assets such as mortgages into securities, or tradeable assets. These are combined into pools that can be divided and sold to investors in smaller pieces. The price depends on the level of the risk of default of different types of mortgage.
Clearing house: This is a third party responsible for processing trades that uses capital from its members to guarantee deals, even if one of them defaults. There is some concern among regulators about whether these agencies could withstand multiple defaults.
Money-market funds: The aim of a money-market fund is to give investors a relatively safe place to invest easily accessible assets at a low risk and for a low return. During the financial crisis, many of these funds dumped their assets and stopped purchasing, causing problems for some investors.Generally describes nonbank entities involved in the creation of credit across the global financial system. They tend not to be subject to regulatory oversight. Regulators are worried about the role they played in the financial crisis.