Licensing of Banks

Background and Reform

As originally constituted in 1942, the Central Bank’s function was to maintain the integrity of the currency and issue legal tender.  In 1971, the licensing of banks was provided for.  It was provided that a bank shall not in or outside the State carry on banking business or hold itself out or represent itself as a banker or as carrying out on banking business or on behalf of any other person, accept deposits or other repayable funds from the public unless it is a holder of a licence.

The licensing of banks has been subject to significant scrutiny and reform at the national and EU levels, following the financial crisis, commencing 2007-2008.  The Central Bank Reform Act 2010 created a single body responsible for central banking and financial regulation.  It replaced the previous Central Bank and Financial Services Authority with a new single entity.  The affairs of the bank are managed by the Central Bank Commission. It is to ensure that the central banking functions and the financial regulation functions are integrated and coordinated.

The integrity and credibility of the banking system are ultimately backstopped by the willingness of the Central Bank authority to provide liquidity (generally not directly but by the repurchase of assets) to an unlimited extent.  The ability of the domestic Central Bank to undertake this function necessarily ceased when Ireland became a member of the euro and ceased to have its own domestic currency in return for currency stability (or the assumption of such) offered by the euro.  The Eurozone Central Banks have become part of the system of Central Banks/ECB.  See the separate chapter on the mechanics of the ECB and its establishment.

Banking Business

An entity is deemed to hold itself out as a banker (or an individual) if it uses words like “bank” “banker” “banking” or a derivative or analogous expression.  Bank may grant exemptions for the use of such expressions as a bank if it is of the opinion that the person does not, in fact, carry out a banking business.

Central Bank notices have exempted certain classes of persons from requiring a bank licence, where the requirement would arise only by the issue of commercial paper or securities or other paper with a maturity of one year or more.  This power to issue such notices is under statutory provision exempting issuers of securities from the definition of a banking business.

The definition of a banking business has been amended on a number of times, most recently 2014.  In essence, banking comprises business consisting or including receipt of money on the banks own account from members of the public either as a deposit or repayable funds and any other business normally carried on by a bank including the granting of credit on its own account and any other business for the time prescribed.  The definition was amended slightly in 2014 but remains broadly similar.

Banks operate the payment system, which is seen as an essential conduit for commerce and trade.  However, notwithstanding the language of money, the legal position is that money “in” a bank account represents an unsecured claim against the bank only.

A deposit is defined as money accepted on terms that it is repayable with or without interest either on demand or on notice or at a fixed or determinable future date.  The Central Bank Acts through the late 1980s, 1990s, and following the financial crisis, have greatly strengthened the powers of the Central Bank in relation to the regulation of deposit-taking.

Deposit-taking is central to banking.  The essence of a bank is that it becomes a debtor in respect of deposits and account monies held and becomes a creditor in respect of loans made.  Because of the inherent risks in banking, many of which are set out in other chapters, banks are subject to detailed regulation.

Granting a Licence

The Central Bank may grant or refuse a banking licence to a company or credit institution.  It may refuse a licence only with the consent of the Minister.  It may not grant a licence to an individual.  The grant of a licence may be refused if it is not in the interests of the orderly and proper regulation of banking.  When it is proposed to refuse a licence, it must notify the applicant within six months and seeks the consent of the Minister.  The entity may make written representations within 21 days to the Minister for Finance.

The Central Bank may revoke a licence.  It may be suspended in whole or in part in respect of.  The suspension may refer to certain activities.

In considering whether to grant a licence for a bank, the Central Bank will consider the structure and ownership of the applicant.  The applicant should be held by one or more banks or other financial institutions of standing. The Central Bank must be satisfied that the applicant is in an acceptable legal form, has a clear and transparent group structure, is clearly identified and adequately research objectives and proposes operations that are consistent with the Central Bank’s licensing and supervision requirements.

The Central Bank must be satisfied with the organisation, including the fitness and the integrity of key personnel; the corporate governance must be appropriate. Risk oversight must be effective in all areas including audit compliance, credit liquidity and financial control. The applicant must be independent of dominant personal interest. Consistency and continuity must be assured in the manner in which the business will be directed.

The beneficial owner should be such as will ensure capacity to provide new capital as may be required. There must be willingness and capacity on the part of the applicant to comply with licensing and supervision requirements on an ongoing basis.

The Bank will have regard to the independence of the applicant and the risks arising from its structure and nonbanking elements of a group.  The entity must have a sound trading record and international credit rating.  There should generally already exist, an entity with a sound management and financing structure with the relevant skills and experience.

The source of group funding must be considered.  The initial minimum solvency ratio is likely to be higher for established international bank groups. There should be initial paid-up capital of at least €5 million.  Evidence of support from beneficial owners/substantial shareholders to the effect that the subsidiary will be in a position to meet its liabilities for so long as the parent shareholder holds the majority is required.  A minimum tier one capital ratio of 15% will be required.

Management and Shareholders

The Central Bank will require an appropriate and experienced management team with strength and depth.  It will require a strong Board, organisational structure, and reporting lines.  The Board is to be responsible for the overall direction of the Bank.  It must effectively delegate implementation to management.

The Board should have a mixture of executive and non-executive directors.  The majority should be independent non-executive directors.  Even in a group scenario, there must be a number of independent non-executive directors.

The fitness and probity regime applies to all directors, senior executives, and individuals in senior control functions.  They must be fit and proper persons and have appropriate competence and experience to fulfill their functions.  The prior consent of the Central Bank is required to appointments to the Board and certain senior roles and positions.

The Central Bank must approve all direct and indirect controllers of the bank, i.e. persons with interest in shares with voting rights of more than 10%.  Regular information as to the shareholdings is furnished.  The Central European Union Capital Requirements Regulations require further information to be furnished if there is an acquiring transaction in accordance with the Directive on Acquisitions.

Passporting

Once a licence is granted, the bank may provide services cross-border or establish branches in the other EU States.  It will be obliged to comply with the conduct of business rules of the host State.

A credit institution which proposes to establish a branch in another State must notify the Central Bank in advance. It must provide the details of the scheme, including details of the business proposed to be engaged in and the manner in which the branch is to be organised.If the Central Bank is satisfied that it has some sufficient resources and adequate capacity to carry out business in another State, it transmits the relevant information to the host State within three months after receipt.

Equivalent reciprocal provisions apply in respect of other States for the establishment of a branch in Ireland. Where an Irish credit institution established in Ireland authorised by the Central Bank proposes to provide services on a cross-border basis into another State, it must notify the Central Bank.  The Central Bank must within one month of receipt, furnish the information to the authorities in the other State.

The Central Bank remains responsible for the bank established.  The host State is responsible for the code of conduct of business rules.  The home state is responsible for basic regulation, prudential matters, capacity etc. Most regulations outside of the doing business or conduct of business area.

Prudential Regulation

The Central Bank undertakes the supervision of licensed banks on an ongoing basis. Prudential supervision entails monitoring compliance with legal and non-statutory requirements.  Data is submitted and assessed on a weekly, monthly, annual basis.   Regular meetings and on-site inspections are conducted.

The conduct of business supervision involves enforcement of the various codes of conduct, including the Consumer Protection Code.

Fitness and probity requirements look at the senior directors, officers and senior personnel.  They must be specifically authorised by the Central Bank and meet fitness and probity standards.  They must have the necessary skills, qualifications and experience.  They must discharge their obligations in an honest, fair and ethical manner.  Senior appointments must be approved by the Central Bank.

The Central Bank regulates fees and charges.  Increases in charges or new charges must be notified to the Central Bank who may prohibit them.

New Approach to Regulation

The Central Bank has radically changed its enforcement strategy following the financial crisis.  It has adopted a new risk-based regulatory framework focused on being more assertive and prioritising the allocation of resources to the areas of greatest risk.  In 2011, the Central Bank launched its risk-based supervision framework PRISM (Probability Risk and Impact System).  It focuses on firms with the greatest risk to financial stability and consumers.

PRISM divides regulated firms into different categories.  Four categories based on the level of risk to the financial system and consumers; high impact, medium impact, medium-high impact or low impact.  This determines the assignment of regulatory resources.

Engagement with the regulated entity is by way of reviews, inspection, on-site meetings and ongoing engagement.  Firms in the high and medium-high and medium-low category have their risk assessed across a number of categories.

The Central Bank has stated that sanctions must carry a credible threat of action.  This includes, in particular, administrative sanctions with very significant penalties in respect of prescribed contraventions.

The legislation passed in 2010, including in particular the Central Bank Supervision and Enforcement Act, the subject of a separate article significantly increases investigative and information-seeking powers and gives a wide range of penalties.  Penalties up to €1 million per individual may be imposed. Penalties of up to €10 million or 10% of turnover may be imposed in respect of a body corporate.