Ireland is steadily coming out of recession. Business activity is reaching levels approaching those before the crash. The financing of property development (always a reliable bellwether for the Irish economy) is becoming very active again. At least for the moment, the economic signs are positive. What, if any, role should the Irish financial regulator – the Central Bank of Ireland (CBI) – play in this dynamic?
There is of course a school of thought that claims that light-touch regulation contributed to the crash in Ireland and further afield. Whether this is correct or not, it seems beyond doubt that regulation affects economic activity and behaviour by market participants. A regulator cannot become a passive participant in the markets. This means that the regulator must make policy choices which will have an impact on economic growth.
Ireland seems well placed to grow still further as a financial services centre. Just as the economy seems about to surge to a new level, there are also opportunities for change on the horizon. Some of these could be positive for Ireland. Politically, Ireland is relatively stable; it is a member of the eurozone; it is a common law jurisdiction and it has an established financial services industry with the expertise (including legal practitioners) to go with it.
For every opportunity for positive change there is equally a chance to scupper progress. The alternative lending market in Ireland has become very significant, with private equity, regulated funds and crowd-funders plugging gaps left by a capital challenged banking system. Alternative lending now plays a major role in the development of Irish businesses. However, CBI has developed something of a fixation on the systemic importance of the alternative lending market. This has manifested itself in scrutiny of special purpose vehicles. The Irish government has also introduced regulation for holders and servicers of loan books which include consumer and (in certain circumstances) SME debt.
Over-regulation of the alternative lending sector (whether driven by the CBI or at EU level) will stifle economic growth. Aside from consumer transactions, regulation plays no useful role in the lending markets.
Ireland is at a crossroads. There are opportunities for positive change – but this could ultimately be elusive unless the right policy choices are made by the CBI and the Irish government. Although there are numerous technical legal issues which need to be addressed, at a macro level the following is required: (i) commitment not to regulate the alternative lending markets; (ii) the radical scaling back of regulatory oversight of financial services provided to non-consumers; (iii) the enhancement of incentives for the location of discrete financial services such as prime brokerage, reinsurance and ship finance in Ireland (the latter to build on the activities of the Irish Maritime Development Office); and (iv) a government commitment to facilitate major financial service providers who wish to locate to, or enhance their presence in, Ireland and for this to be reflected in CBI policy-making.
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