{"id":622,"date":"2021-06-11T22:37:16","date_gmt":"2021-06-11T22:37:16","guid":{"rendered":"http:\/\/legalblog.ie\/?p=622"},"modified":"2021-06-11T22:37:31","modified_gmt":"2021-06-11T22:37:31","slug":"bank-solvency","status":"publish","type":"post","link":"https:\/\/legalblog.ie\/bank-solvency\/","title":{"rendered":"Bank Solvency"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_63 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Background\" title=\"Background\">Background<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Basel_Accords\" title=\"Basel Accords\">Basel Accords<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Pillars\" title=\"Pillars\">Pillars<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#EU_Capital_Adequacy_Directive\" title=\"EU Capital Adequacy Directive\">EU Capital Adequacy Directive<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Basel_III\" title=\"Basel III\">Basel III<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Revised_EU_Approach\" title=\"Revised EU Approach\">Revised EU Approach<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/legalblog.ie\/bank-solvency\/#Supervisory_Authorities\" title=\"Supervisory Authorities\">Supervisory Authorities<\/a><\/li><\/ul><\/nav><\/div>\n<h3><span class=\"ez-toc-section\" id=\"Background\"><\/span>Background<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Ireland ratified the Bretton Woods Agreement at the end of the Second World War establishing the International Monetary Fund and the World Bank. \u00a0In its early years, the system pegged the exchange rate of currencies to the dollar. \u00a0The dollar was itself was itself \u00a0pegged to gold.<\/p>\n<p>In 1971 the United States decoupled the dollar from gold and they revalued it following severe pressure on its value. This system had operated as the mainstay of monetary stability and its breakup accompanied financial pressure in the United States. \u00a0It was ultimately followed by a period of sustained inflation in the western economies.<\/p>\n<p>The late 1980s and early 1990s saw a shift from detail rules-based regulation to the principles-based regulation of credit institutions and other financial service providers.\u00a0 This approach required management to apply principles on a largely self-regulatory basis. \u00a0As the financial services industry grew more complex the self-regulatory principle-based approach commended itself.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Basel_Accords\"><\/span>Basel Accords<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Basel Committee comprises the Central Bank governance of the larger nations. The committee publishes regulatory and supervisory standards and guidelines on best practice. \u00a0Its principles are reflected in European Union law.<\/p>\n<p>The first Basel Accord was agreed in 1988 as the standard for regulation of bank capital and reserve. \u00a0In 2004 a revised capital adequacy standard Basel II was agreed upon.\u00a0 Basel III was approved in 2010 and is to be implemented by 2019.<\/p>\n<p>Basel II sought to provide risk-based capital requirements. \u00a0It proposed that banks would have considerable flexibility in deciding the nature of their risk management policy.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Pillars\"><\/span>Pillars<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The first aspect or pillar relates to the capital requirements required for various types of risk which the bank runs.\u00a0 Risk is divided into different types including credit risk, market risk, and operational risk. \u00a0Capital requirements are linked to the risk and different requirements are tied to the types of risks. \u00a0Regulators are allowed considerable freedom in assessing the risk.<\/p>\n<p>The second pillar is a regulatory response to the first pillar, giving regulators &#8216;tools&#8217; and powers It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk, and legal risk, which the accord combines under the title of residual risk.<\/p>\n<p>The supervisors must consider how banks assess their capital needs relative to their risks and regulate accordingly. \u00a0Banks must be in a position to appraise their overall capital requirements, with reference to the risks in their business. Regulators must be in a position to review these assessments and strategies and monitor compliance. \u00a0They will require banks to operate above minimum capital ratios and have requisite capital.<\/p>\n<p>A third pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements that will allow the market participants to gauge the capital adequacy of an institution. It requires the disclosure by financial institutions of their capital adequacy assessment. This should allow institutions to assess other institutions.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"EU_Capital_Adequacy_Directive\"><\/span>EU Capital Adequacy Directive<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The European Union Capital Adequacy Directive follows the Basel II principle. \u00a0It set standards for the capital adequacy and prudential regulation of credit institutions and investment firms. The capital adequacy directive has been amended and is likely to be supplemented or replaces by a single directly effective EU regulation n the near future.\u00a0The capital adequacy directive applies to banks that hold deposits and other repayable funds and grant credit on their own account.<\/p>\n<p>The first pillar sets out \u00a0the principles for ascertaining the required capital. \u00a0This may be determined under n external rating based approach or an internal rating-based approach, where the latter is permitted by the regulator. There is provision for risk rating in relation to credit, operational and market risk.<\/p>\n<p>The second supervisory pillar requires the regulator to review the institution&#8217;s risk appraisal. \u00a0Recent amendments require remuneration policy principles in relation to certain senior management.<\/p>\n<p>The third pillar requires the disclosure in public of certain information.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Basel_III\"><\/span>Basel III<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Basel rules proved hopelessly ineffective in the financial crisis. \u00a0The Basel III system grew out of the failures of Basel II in the economic banking and financial crisis. \u00a0It raised the required equity relative to risk-weighted assets progressively by 2015.<\/p>\n<p>Banks were required to have additional capital buffers to withstand adverse shocks. \u00a0The total equity capital is to be increased and tier 1 capital is to increase from 4 to 6 percent. The definition of capital is amended.<\/p>\n<p>International standards have recommended the modification of the systems of remuneration linked to undue risk-taking. The financial crisis has reminded regulators that the critical role of banking in the economy is such that banks ought not to be allowed to take risks and be subject to moral hazard.<\/p>\n<p>Mechanisms have been recommended for the resolution of insolvency in financial institutions without destabilizing the financial system. Strategically important financial institutions should have increased capacity to withstand risk due to their systematic importance. \u00a0They should be more intensely supervised.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Revised_EU_Approach\"><\/span>Revised EU Approach<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Following the financial crisis, the European Union has modified the overall supervisory approach.<\/p>\n<p>The European Systematic Risk Board is responsible for overall oversight of the financial system in order to prevent systematic risks in financial stability. It has the function of collecting information, identifying risk, issuing warnings and recommendations, following up the warnings, cooperating with other authorities and liaison with the IMF.<\/p>\n<p>The ESRB consists of members of the ECB and central banks of the states together with a range of other representatives.\u00a0The ESRB provides national regulators with information on risks relevant to their own requirements and responsibilities. \u00a0The ESRB may issue recommendations to national authorities and warnings. \u00a0It does not have legal power, but national regulators must respond and give justification if they do not follow the direction or recommendation.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Supervisory_Authorities\"><\/span>Supervisory Authorities<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The European supervisory authorities comprise the European Banking Authority, European Insurance, and Occupational Pension Authority and the European Securities and Market Authority.\u00a0 They are comprised of national regulators of the states.<\/p>\n<p>The European Banking Authority consists of the representatives of the supervisory authorities<\/p>\n<p>The European Banking Authority is to<\/p>\n<ul>\n<li>establish a common registry and supervisory standards:<\/li>\n<li>contribute to the consistent application of binding EU rules.<\/li>\n<li>organise and conduct peer review.<\/li>\n<li>undertake economic<\/li>\n<li>consider capital adequacy.<\/li>\n<\/ul>\n<!--themify_builder_content-->\n<div id=\"themify_builder_content-622\" data-postid=\"622\" class=\"themify_builder_content themify_builder_content-622 themify_builder tf_clear\">\n    <\/div>\n<!--\/themify_builder_content-->\n","protected":false},"excerpt":{"rendered":"<p>Background Ireland ratified the Bretton Woods Agreement at the end of the Second World War establishing the International Monetary Fund and the World Bank. \u00a0In its early years, the system pegged the exchange rate of currencies to the dollar. \u00a0The dollar was itself was itself \u00a0pegged to gold. In 1971 the United States decoupled the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[49],"tags":[],"_links":{"self":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/622"}],"collection":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/comments?post=622"}],"version-history":[{"count":2,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/622\/revisions"}],"predecessor-version":[{"id":29788,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/622\/revisions\/29788"}],"wp:attachment":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/media?parent=622"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/categories?post=622"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/tags?post=622"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}