Elderfield looks set to turn spotlight on IFSC

MATTHEW ELDERFIELD has set out his stall as head of financial regulation, showing a willingness to roll up his sleeves with the big banks to prevent future crises. But what will his “get tough” approach mean for the IFSC, which attracted international firms with the one-time gentle regulatory approach?

Elderfield plans to keep score of the risky companies and said that these may include IFSC firms.

“High impact” firms will require extra supervision and will be determined by the size of their trading book for a wholesale bank or counterparty exposure for credit markets firms, for example.

Given the size of the financial services industry, a number of the international firms around the Dublin docklands may well find themselves under Elderfield’s most powerful microscope.

“There might be some IFSC firms that will be in our highest risk category,” he told us in an interview. “There might not be a lot but there may be a handful in the banking area and a handful in the insurance area.”

Clearly Elderfield will want to stop another problem like Depfa, the Dublin-based lender that was bailed out by the German government, happening again. Depfa caused tension between the Irish and German regulators, with the Dublin supervisor pointing the finger at Berlin, saying responsibility lay with the home regulator.

“If you have a high-impact IFSC firm, we will form our view as the regulator – we will set the agenda as to where we think the risks are,” Elderfield said in the interview.

His risk-based approach to regulation must be applied to the IFSC firms as well as the big domestic banks, he said. “If they show a good track record with us and have good controls and their business risks are under control, then we can calibrate our supervisory approach accordingly,” he said.

He warned that this may involve engagement with the boards of the firms and forcing them to mitigate their risks if the regulator is not happy with their operations.

MySpace but not ad space

The Commission for Communications Regulation (ComReg) has turned its attention to the quandary posed by the rise of social networking: how to “monetise the audience”.

ComReg muses that while Facebook, Twitter, MySpace et al have the potential to change how consumers are targeted, “the current level of advertising activity on social networks isn’t aligned to the size of the audience”.

At this, users can breathe a temporary sigh of relief and get on with selling themselves without constant interference from the professionals.

But failure to cement a profit model for social networking advertising is a problem not just for advertisers, ComReg notes, but for telecoms providers.

“The increasing popularity of these sites is putting more pressure on the network providers to upgrade their networks to cope with bandwidth-intensive applications such as videos and photos, yet they derive little or no revenue streams from these content services,” it notes.

ComReg reveals an advertising market that is paralysed, perplexed and at times repulsed by social networking users. It’s a difficulty.

To make matters more confusing, it turns out that social networking users do not even have the decency to stick to a definable age bracket: having started out as a student site, one-quarter of Facebook’s users are now over 50. The shifting demographics explain why the US pharmaceutical industry, which is already allowed to advertise on television, is now desperate to be allowed to flog branded drugs on Facebook.

While the telecoms industry frets about what might happen if advertisers fail to “monetise” the audience, consumers should worry about the consequences if they succeed.

Banking on life after Nama

Next week is Nama week and all eyes are on the haircut that will be taken on the loans going in and the read-through for the bank’s balance sheets and the need for Government capital.

But what of life after Nama? Well, if Goodbody Stockbrokers are to be believed, it will not be that pretty. The broker has taken a look at the state of the two big banks’ non-Nama loan books and tried to get a handle on how much of the banks’ capital will be eaten up dealing with the losses lurking within them.

Goodbody estimates that AIB will have to soak up another €8 billion worth of losses on its mortgage, small business, consumer and commercial property lending. This is on top of the €8 billion hit it will take on the loans going into Nama.

Bank of Ireland is looking at another €6.5 billion in losses on top of the €4.1 billion loss on the loans going into Nama.

And what does this mean for the banks’ balance sheets? Well, Goodbody estimates that AIB will need between €4 billion and €6 billion of new capital, depending on where the regulator sets the bar for capital. Similarly for Bank of Ireland, the range is between €2.7 billion and €4.4 billion.

The figures at the lower end of the scale seem compatible with the notion of the banks remaining independent, but the ones at the top end look like the cue for nationalisation.

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