A proposal to establish a new single regulatory authority in the Republic has again become a live issue due to the proposed merger between Bank of Ireland and Alliance & Leicester.
The regulatory position is now one of the biggest obstacles to the merger going ahead, with both the Central Bank here and the UK regulator, the Financial Services Authority, very aware of the issue of depositor protection in a company where the ownership crosses national boundaries.
According to the banks this dual company structure will preserve the continuity of both banks' shareholder base. It does mean that the most likely regulatory outcome is that both the Central Bank and the FSA will remain as regulator in their own countries. However, the crucial issue will be who ends up as "lead" regulator - with overall responsibility for overseeing the new institution - and that will depend on where the head office is based.
The authorities here would prefer the head office to be in Dublin, protecting jobs here. It is also keen on maintaining the prestige of having the headquarters here.
Regulators are keen to ensure it is clear who co-ordinates the supervision of any particular group. Bank of Credit & Commerce International's spectacular collapse is a stark reminder of what can happen if each regulator thinks someone else is in charge.
The issue of supervision is particularly important here: regulators would be worried to lose oversight of an institution accounting for 2022 per cent of the domestic banking market.
But the most important thing will be for regulators to agree on the division of responsibilities.
Some observers point out that the eventual 12.5 per cent corporation tax rate which will apply in the Republic in coming years may be one reason for keeping the headquarters in Dublin.
On top of that, according to the MSF union, which represents Central Bank staff, a new regulator is also likely to have difficulties, given that it would be dependent on an industry levy for its funding.
"This is likely to prove a very thorny issue for an Irish authority funded by the industry as proposed by the advisory group," Mr Jerry Shanahan, MSF's deputy national secretary said. "However, if a Central Bank subsidiary were to regulate the Irish industry it would be unlikely that such difficulties would arise as the merged bank would not have to pay fees to fund the SRA's regulatory work as it would have its own independent source of funding through the Bank."
Industry sources also note that there is an issue here for both Bank of Ireland and Alliance & Leicester in terms of the Central Bank's expertise and track record in regulation and supervision. They note that while a lot has yet to be worked out, this will be the single biggest restructuring of a financial services institution in Ireland and the first with such cross-border implications. Thus the merged banks will themselves be keen to be under a regulatory regime which has the confidence of investors and the wider community.
At the same time, mergers of this sort are likely to become more common across Europe and thus it is critical that this one is handled in a professional manner. It is certainly possible that uncertainty could be created if there was a sudden change of regulator in the middle of the race.
However, others point out that it is likely to be some time before the proposal on the new Single Regulatory Authority even comes to Cabinet. "The merger will have gone through before there is any change of regulator," one source noted.
The McDowell report was delivered last Thursday to the Tanaiste and the Minister for Finance but it has not yet gone to Cabinet. Sources say the issue around the Bank of Ireland will most likely now be considered by Cabinet as well as issues on staffing, finance and organisational structure.
The discussions on regulation of the merger are also likely to be closely watched by the European Central Bank. It is the first example of a cross-border merger between a euro area and non-euro area financial institution. The ECB believes that a single European regulatory authority will eventually have to be set up, given the likely increase in cross-border mergers and it would like any such future body to be under its control.
Thus there will be those in Frankfurt who would be keen to see the regulation under the Irish Central Bank's control rather than under an outside agency or indeed the FSA.
