Elderfield warns over loss-sharing

Ireland shouldn’t go it alone in seeking to share losses with senior bond holders in banks, the head of financial regulation said.

Speaking this morning in Dublin, Matthew Elderfield said any decisions on sharing losses with bond holders must be taken in a Europe-wide context, and warned it was not a "no cost" option.

Mr Elderfield was speaking on raising standards in banking. The Central Bank today published proposals governing the fitness and probity of individuals working in the Irish financial services industry.

The plan is intended to ensure those operating at senior levels in regulated firms are "fit and proper". It will also give the regulator power to remove individuals from certain posts should the need arise.

"Where an issue arises we will have the power to carry out a full investigation. And now, with our new powers, we will be able, where appropriate, to suspend or remove an individual from a senior position in a regulated firm," Mr Elderfield said.

Those working in such firms will be required to act honestly, ethically and with integrity, he said.

"I would say that our proposed standards will enable greater clarity and robustness in dealing with individuals who have been removed from other positions or otherwise have been subject to civil or criminal sanction, in this jurisdiction or elsewhere," Mr Elderfield said.

The proposals also provide for financial soundness, meaning individuals who wish to carry out senior functions in the financial services industry will also have to demonstrate the ability to manage their affairs "in a sound and prudent manner".

Competence and capability will also be assessed and will take in not only professional qualifications and experience, but also an understanding of governance and risk management standards and a firm's particular business model. The Central Bank will also look at an individual's track record in the industry.

The new powers, will apply to all financial services companies, are expected to come into force on September 1st.

Boards of banks that accepted Government support will be subject to review by the Central Bank to ensure they meet the new standards. This will apply to any executive or non-executive director that plans to be in office as of January 1st, 2012

Speaking about the stress tests currently being applied to banks throughout Europe, Mr Elderfield said such tests have become a "crucial regulatory tool" in assessing the required capital for credit institutions.

"The importance of these latest stress tests is perhaps greater in Ireland given the context in which this latest exercise is taking place," he said.

"These tests take place in the context of a severe crisis in the euro sovereign debt markets, a weaker Irish economy subject to further fiscal consolidation, as part of a formal EU-IMF programme for Ireland and against the backdrop of a lack of market confidence in the Irish banking system, reflected in the stressed wholesale funding position of the banks and concerns about future loan losses under adverse scenarios."

Mr Elderfield said the Central Bank's objective was to approach the tests with more conservatism, transparency and stronger validation.

Some €35 billion has been earmarked from the bailout package to recapitalise the nation's banks after stress tests results are published next week.