Central Bank of Ireland Deputy Governor, Ed Sibley, on Brexit, mortgage costs, banker bonuses, insurance failures and Philip Lane
TRANSCRIPT OF FULL INTERVIEW with Irish Independent Business Editor Donal O'Donovan.
DONAL O’DONOVAN: The topic of the week, the month, the year, is Brexit. There are two things happening - one is that there is some movement of financial services firms out of London, some to Ireland.
So just in terms of the raw numbers and the value of that as a process, what have you seen – what do you think the final break down of firms and jobs coming here?
ED SIBLEY: I mean, I think we’ll see at least two phases too it. So we are a long way through the first phase, which as we’ve probably talked about more than a hundred applications either as fresh authorisations or changes or extensions to existing authorisations.
And we’re working our way through those at pace as I’m sure you know and that has varied from very large – so some of the banks that are in the public domain - some big insurers as well - to some much smaller payments institutions investment firms and the like so the raw number of well over 100 isn’t really indicative of what it means from an economic point perspective.
We are seeing a good number of jobs, again you’d see some of the numbers that have been reported in terms of the likes of the bigger banks - so low hundreds - and some kind of medium size moves which would be 10s and scores and then some smaller - ones and twos.
So there is that aspect to it. I think that’s obviously of interest from a commentator perspective from a broader economy perspective and from how the financial system evolves.
DONAL O’DONOVAN: From a regulator’s perspective some of them are by definition going to a little bit unanchored in the Irish economy, more like the IFSC, what is the mix of activities that you are seeing and does it radically alter the mix of activities here and does that put a strain on you as regulator?
ED SIBLEY: So – what we’ve seen is that the majority of firms - if I put insurance to one side for a moment – the majority of firms that are coming as a result of Brexit are coming to continue to serve EU clients post Brexit. So by their very nature they are most likely to be exporting financial services rather than serve the domestic economy
The insurance industry is a little different because there was more cross border activity from the UK – a little bit from Gibraltar – from the UK into Ireland and they need to solve for that. So there has been some movement in the insurance industry but other than that it is mostly externally focused.
A lot of it we are used to and familiar with but there is more complexity come in, again if we talk about the banking side and the investment firms we are seeing more investment banking activity we’ve had pieces of that before but not to the same extent that we have now.
We’ve skilled up. We’ve got some support in terms of training and from consultants, we’ve recruited and we’ve used the expertise we have. I’ve got personal expertise in terms of dealing with some of these firms when I was in the UK.
But we are also part of a much wider organisational arrangement.
So, it’s not solely what we have here, we’re part of the single supervisory mechanism, we’re part of banking – overall banking supervision across the eurozone – and we work very closely with our colleagues in the ECB. So, whether a firm is situated in Frankfurt, or Paris, or Dublin, the supervision is the same. The skill set we have, we can draw on from the sense of the learning and methodologies we follow – there is a good deal of consistency.
And that’s hardwired in banking. Where we see activity that is similar areas we can obviously leverage that in terms of some of the larger areas,
DONAL O’DONOVAN:And that’s working, because obviously Paris, Amsterdam and Frankfurt in particular are getting some of that new mix of exiting institutions from the UK at the same time.
ED SIBLEY: Yeah, yeah. Overall I’m satisfied that it’s working reasonably well. It’s not without its challenges. Overall I think the Central Bank has done a really good job on Brexit – authorisation is only one aspect of that. But we’ve had to make some hard choices in order to do that – in terms of prioritising Brexit over other work that we might have done had it not been for Brexit and all the work that we’ve had to do to; primarily make sure the system here is resilient enough to continue to support the economy and its customer in the eventuality of a hard Brexit.
DONAL O’DONOVAN:So what did you - in terms of the hard choices – what did you have to not do or do less of?
We have a supervisory methodology around how often we engage with firms, the extent that we do pieces of work and in fairness some degree of optionality about areas that we are interested in and think that we should be looking at. So some of that we’ve deferred, some of what we’ve said we’re not going to do right at this moment. That’s all been done in a very conscious way, not entirely without risk, but in a conscious way weighing up the resource demand the risks associated with Brexit relative to some other risks and prioritising Brexit.
We have finite resources both in terms of numbers and skills sets so, you know, you have to make those choices.
DONAL O’DONOVAN:Do they know? The banks the financial firms – do they know the places where you weren’t necessarily looking hard this year?
I wouldn’t necessarily be explicit about these things, what we’ve made sure we’ve continued to engage in an – it’s a bit of cliché – but in an outcomes focused way. But there are some areas where maybe we didn’t meet all the management team that we might have done or we’ve moved to a – if we had a 12 month cycle for the work - maybe have an 18 month cycle - but not I think within the bounds of good risk management
DONAL O’DONOVAN: So, we were talking about Brexit and the potential for a Brexit bonus in terms of financial services in Ireland, but the bigger context really is the Irish economy if we’re thinking about Brexit.
ED: Obviously more important but maybe just - I talked about a first wave. I think probably there’ll be secondary movement given the level uncertainty still at this stage about the outcome.
Some firms have moved definitively and they have done everything that they need to continue to fully operate.
Others have, are a little bit more conditional in term s of the moves they’ve made so enough for them to continue in the immediate post a hard Brexit but with a potential I think that later investment decisions and later choices that will be made over time.
So I’d imagine that once we have more clarity about precisely what the UK exiting the UK looks like we will then see some more iterations and some more developments.
But you are right. The bigger issue for Ireland is very much the concerns about the wider economic impacts given the close connections culturally and economically. A lot less than they were – if you go back 45 years when Ireland and the UK joined the EU.
There’s a lot more trade that Ireland does that goes beyond the UK. Not as dependent but still very close connections.
DONAL O’DONOVAN: And the economy is much more financialised now than it was 45 years ago so we did obviously export overwhelmingly goods to the UK at the time but it’s a much different economy the integration is almost total in some parts of the economy – you almost don’t export - or it feels like you don’t export or import services for instance.
ED SIBLEY: Yes. The nature of a hard Brexit with both tariff and non tariff friction coming in to trade with the UK would be, particularly for certain sectors and we published our - as much as you can do anything - our views for what potentially impacts would be in certain areas and certain sectors particularly indigenous industries. So there’s that side of things, there’s also a lot of the large international players think of UK / Ireland as one place to supply goods to so and so on and there are inevitably going to be impacts in terms of that. So what my role has been, I think, and what I have been very much focused on is to make sure that as much as we can we can mitigate the risks to the financial system such that the financial system, as I touched on earlier, is resilient enough to withstand the shock of a hard Brexit and continue to serve what will be acute needs of the economy and customers in that scenario rather than being an extra headache or a cause of problems.
And I’m satisfied that with the work that we’ve done and the work that’s been done by other important parts of the infrastructure of the State and the EU and really importantly actually the continued rebuilding of resilience of the financial system over last decade, we’re in a reasonably good place and I’m reasonably confident we can manage those risks. But that’s not to say it wouldn’t be bumpy and difficult particularly if, as it stands I don’t think a hard Brexit is fully priced in, so there would be inevitably some market dislocation if that’s what were to emerge in a short number of weeks or if there was a short delay to that.
DONAL O’DONOVAN: In terms of resilience there are two elements to it – I think maybe there are two elements to it. The financial plumbing - so the actual systems: money moving across the border, the settlement of big transactions the deep financial plumbing – are you happy that that’s all ok?
Because we are historically very integrated into London in terms of that.
ED SIBLEY: Yeah. I don’t think we re alone in that though. If you think about London today, it provides a lot of the plumbing as you describe it, the infrastructure, clearing and so on for the whole of the EU. So its not just Ireland that is potentially impacted.
There are some unique aspects to the Irish interconnection so securities settlement is done through or largely through London and that’s a unique aspect for Ireland.
But the work that has been done at a central level the Commission announcements in mid December about central clearing and securities clearing and deeming that London will be deemed equivalent in those respects for a period at least, allows us to have degree of confidence that the plumbing will continue to work.
DONAL O’DONOVAN:And the other aspect is the actual hit, the financial hit, so if the UK goes into recession the Irish economy will inevitably suffer. The Irish banks which are exposed to the Irish economy and to the UK will suffer. So how bad do you think that might get – have you had to do an assessment of the potential for losses in the banking system here in the event of a hard Brexit, for instance?
ED SIBLEY: So, perhaps a better, the way we‘ve looked at that, we clearly look at downside risk and downside scenarios not just for banks but for insurers and others as part of our ongoing supervision and analysis work. There was the European Banking Authority stress test last year which continued to show that there are vulnerabilities in the Irish banks to economic down turns. Still vulnerabilities associated with relatively high levels of non performing loans for example but they are much stronger than they were.
The outcome of those was published, you can see that relative to two years ago they are stronger now than they were two years ago both in terms of their starting position – balance sheet strength today and also in terms of the business they are doing today, so that’s one element.
We would also be thinking about, ourselves and with our colleagues in Frankfurt, where are the particular vulnerabilities to that economic downturn you describe and how satisfied are we from a financial stability perspective they can withstand a hit, we are in completely different circumstances for the domestic banks than we were a decade or so ago in terms of the level of capital that is in the system there’s three times as much – more than three times as much - in terms of risk weighted assets.
Their funding profile is much more deposit funded than on the wholesale and short term markets - so much less vulnerable to a shock. And their business models are different they are heavily concentrated in property but more mortgages than commercial real estate as was the case.
But that’s not to say an economic downturn in the UK and Ireland wouldn’t be painful and difficult, but it is not to my mind of a scale that would cause us – across the system - financial stability issues.
DONAL O’DONOVAN:And is it banking that you see as the more vulnerable, obviously insurance us different?
ED SIBLEY: We have I think we have a really interesting financial system in Ireland. A lot of attention is paid, and understandably so, to the domestic parts of it – so the banks, the non life insurers, credit unions. But there is a very big funds industry here, there are global insurers here, there is a very significant and growing international banking sector here and large numbers of payment institutions and the like.
Each of those has different vulnerabilities or different potential risks associated with a hard Brexit. We have engaged across all sectors to make sure that the firms here or that are operating here are preparing themselves – because it ultimately responsibility is on the firm to make sure that they are protecting their business and are protecting their customers and we have engaged to make sure that is the case, and then to think about specific issues that might impact individual firms or if there are – and there aren’t many of these – if there are issues that are more systemic in nature then maybe they can’t be self-solved by the firms themselves and there is some very small number of that, I think, and an example of that is what we’ve done in terms of the proposed run off regime within the Brexit Omnibus Bill and that is very much about protecting consumers of insurance policies that have been written outside the State.
DONAL O’DONOVAN:Its very stark thing – that we could be looking down the barrel of a hard Brexit this month, but you are reasonably confident that the resilience is in the financial system to ride it out – its not going to be good for anyone – but to ride it out?
ED SIBLEY: The short answer to that is yes and that is based on not just the work of the last three years when we’ve done a lot of specific work on Brexit, but on the work of the last decade. So, its very difficult to predict precisely how a hard Brexit would impact both economically and in terms of market conditions.
So one can never be100pc there isn’t something that is going to cause a problem but my view, based on all the work we’ve done, the analysis we’ve done, the interventions we’ve made is that the financial system shouldn’t be a cause of further problem.
It should be operating to continue to serve the needs of the economy and customers albeit given the level of market disruption that I think a hard Brexit could cause – because it is not priced in – it will be bumpy, but bumpy in a way that is not catastrophic as we have seen here before.
DONAL O’DONOVAN:There are other structural things going on in the banking and financial services system generally. Even if Brexit wasn’t going on, the banks would be facing into a big change, insurers are facing into a big change around technology around internationalisation, around at, some point cross border movement into the country.
So what are you seeing there? If you were to park Brexit, what are you seeing in the financial sector?
ED SIBLEY: So, maybe a good way of thinking about it is if I talk a little about how we are thinking about our strategy, the aspects that are directly relevant to your question are really three-fold – if we put Brexit to one side - the resilience piece - there is consumer protection.
So from a resilience perspective the way I think about resilience from a regulators’ perspective is I think about four things.
I think about the capital and liquidity – the financial resources of a firm; I think about its business model - I think about how its run, governance, control, culture; and can we deal with it if it gets into difficulties – can it recover, can it be resolved?
Those are my four things – outcomes that I’m seeking to achieve.
And when we think about disruptive change which is coming, inevitably it really goes to thinking about certainly three and maybe even four of those things.
So we have to think about business model risk. So for an incumbent firm what are the threats that are out there in terms of say financial innovation?
For the large banks, is that an existential risk or is it…? And actually you can think about this in a number of ways – but there absolutely are changes to the services that customers expect and how they expect to get them.
And that necessarily will impact on business models.
And on how firms need to think about this - they need to have sufficient financial resources to invest to continue to serve the customers as they’re expected and they need to manage the risks well.
And we all, we are increasingly reliant on technology.
Even if you put financial innovation to one side, the risks associated with outages, weaknesses in resilience and indeed cyber crime threats are very sizeable and quite instantaneous.
So, the way that I think about these things to make sure that the risks around that are understood and are being well managed, that firms are investing in their infrastructure, are making smart decisions and their strategies take account of it.
And you can apply that to the banking sector and also to insurance, probably even in some respects insurance is more in the front line that banking, because that really is reflecting on the what and the how.
Think about self drive cars as an example, ultimately that will impact on insurance.
And then there are other issues that are maybe slightly longer term but not that much longer term that we need to think about which includes the likes of climate change, which I think has something of an exponential threat to it; and slightly longer term demographic change where we have a very significant aging in the population – Ireland has a relatively young population - relative to other parts of Europe - but there are some issues there and you then combine that with decline in home ownership those are kind of macro and micro aspects.
So we need to do the day job really well in terms of supervision and making sure risks are being mitigated. Where we see risks that aren’t, where we see risks in the it area – which I’m happy to talk about a little bit more if you wanted – but we also need to try and look forward more.
I would differentiate between this strategic plan and previous strategic plans. I would hope that during the course of this strategic plan we are as much about looking forward as looking back, which I think over the course of previous strategic plans for obvious reasons and correctly were trying to look back and fix things that were broken, and we’re not completely out of that.
DONAL O’DONOVAN:There is a sense – some of the banking technology infrastructure in the incumbent banks is creaky and at the same time, this month we’ve seen an awful lot of money allocated for dividends out of the same banks for shareholders. Are you happy A that the plumbing – the technological plumbing in the banks is fit for purpose and B that the level of investment that is happening in them is appropriate?
ED SIBLEY: So I think it is beyond doubt that – most of the banks – and certainly those that are paying dividends are also investing heavily in their IT infrastructure. Generally speaking the dividend pay-outs in Ireland are lower than in other parts of the Eurozone, whether in terms of as a ratio of profits, and it is important that banks operating here are investible.
DONAL O’DONOVAN:Are they investing enough in their technology?
ED SIBLEY: I’m slightly careful about how I’ll answer that question.
DONAL O’DONOVAN:Don’t be too careful.
ED SIBLEY: What I mean is I don’t want to get into specifics, I can’t get into specifics.
But if you look at what is in the public domain for those firms that have just recently released their results, particularly those that are paying dividends they are also investing in technology infrastructure.
I think what we have also seen, and I’m not complacent about this at all, we have also seen over the last six months or so a reduction in the level of incidents in the payments system. Now that could change tomorrow, we have pushed very hard to make firms improve their IT infrastructure and their IT risk management capabilities.
We have now created a central IT risk team. That was originally created in bank supervision it now covers all sector.
We are very active in terms of being out inspecting, finding issues, getting issues resolved. We’ve issued policy guideline and the like to outline our expectations, our expectations aren’t met in every instance and where they are not met we are engaging with each individual firm to make sure that they are.
I think we have, some firms have a degree of catch up to make, because they’ve had years of almost existential crisis themselves and maybe didn’t invest enough in IT three /four / five years ago and are having to make more costly interventions now both on a resilience perspective but also in terms of that capability to continue to serve their customers as they are expected to do.
Honestly the thing I worry about most today is IT cyber related issues because the burn is so fast, whereas other issues we have done a lot of work to make sure the system is much more resilient.
DONAL O’DONOVAN:It is the same solution though presumably – it’s investing in the best technological capability?
ED SIBLEY: Yes, I’ve spoked about this publicly before, my own view is yes you have to invest. But one can see how firms across the different sectors get picked off. So it’s not necessarily that everyone has to be best in class but you definitely don’t want to be worst.
DONAL O’DONOVAN:But in terms of a regulatory intervention – have you had to make significant regulatory interventions with regulated entities to tell them to bring their it up to scratch?
ED SIBLEY: Yes, yes most definitely and over many years now. So we’ve had the unfortunate experience of the outage in Ulster in 2012, that we were clear and public in terms of what we thought of that and the need to address that both here and at the RBS level.
And there are lots of things we do at an intervention level which obviously we cant talk bout in the public domain, but we have been very active and increasingly active in terms of it risk over the last few years.
Its an area that I would like us to continue to do more in. The broader question about operational resilience I think is a really important topic for now and into the future for firms themselves and from a supervisory perspective so I think firms can expect us to be doing more and more in this area because its absolutely critical, because they are – we are all - so dependent on technology working well.
DONAL O’DONOVAN:Then – in terms of being a regulator, obviously a big regulatory issue has been the tracker mortgage scandal and then the redress and management of that. So where are you in terms of what the follow on – having identified and addressed – what’s next?
ED SIBLEY: Well , my colleague Derville Rowland leads on the Conduct side so she’s leading on trackers but we’re very much connected in making sure we re working together on it and I’m supporting the work that is being done, and as you rightly infer there’s strong connection in terms of the specific issue and what do we think about the longer term.
First and foremost – tracker issue demonstrates a failure to comply with expectations, guidelines and rules, so at a minimum I expect regulated entities be they banks, be they insurers to comply with the rules that are in place.
But that isn’t enough because we also have to think about outcomes and it’s not ok for firms or individuals within firms to check-out when they think about decision making whether it – if it - complies with the rules then it must be ok.
And I think we’ve seen strong evidence – not just in Ireland, you see it in the UK and the Royal Commission in Australia – a combination of rule breaches and cultural challenges, so the culture of these firms needs to improve and be addressed and we’ve done a lot of work on culture and published a report last year on banks and we are in the process of following up on that.
There s also a need, we think, to enhance individual accountability, so we’re engaging with Finance and we’d hope that there will be legislation passed in due course when its ready, to implement a senior executive accountability regime here.
And that gets away from the kind of ‘Mr Nobody did it’, at least it is clear from the get-go who is responsible for what and we would hope that that would actually help; and experience from the UK is that it is actually not unwelcome by firms as helping be clear as to responsibilities within a firm. We are also publishing tomorrow the latest figures around diversity - and there is a chronic lack of diversity at senior levels in financial services and I think if you put tend to put similar people in similar circumstances and ask them to make similar decisions under similar pressures - you are going to end up with similar outcomes.
I think we’ve seen that in the Crisis – the lead up to the Crisis and I think we’ve seen elements of that with the trackers. And so to continue to enhance diversity and inclusion – I think the two go hand in hand – is important. And then we are also strengthening the work we do ourselves.
A lot in terms of what’s happening is rooted historically, in terms of the good work that has been done more recently in terms of the examination but we also need to strengthen the work that we do ourselves.
DONAL O’DONOVAN:There was an obvious regulatory failure – in that this happened across all of the financial institutions where it could have happened at the same time, in almost exactly the same way.
If we were talking in 2011 or 2012 about the tracker mortgage problem – here in this or rather the old building – the problem we’d have been talking about, the problem people at the Central Bank were talking about, the problem the Troika talked about, was the problem of how little money banks made from tracker mortgages and how that was a problem that needed to be resolved.
And various things were looked at around resolving that we know – but that couldn’t happen because you can’t take a contact off someone in Ireland unilaterally.
Do you think and have you looked as an institution about whether that gave a nod or even a nudge to financial institutions to try and get people off trackers and did that go too far?
ED SIBLEY: So there was – the discussions I was involved in - I came back to Ireland in 2012, there were discussion about trackers but it was more about what could be done from a wider bank perspective so were there options in term of moving trackers – having trackers in a different form away from the banks.
There was never any conversation about moving individuals off trackers, in fact the interventions that were made by the Central Bank pre 2008, during the height of the crisis into 2009, and beyond was very much about the importance of clear communication, adhering to contracts, and the outcomes expected in the consumer protection code, so it was the actions that were taken at that point that have enabled the actions to be taken under the tracker mortgage examination.
Io I think that the actions that were taken then were very important and were very much focused on insuring or trying to insure that what actually came to pass didn’t come to pass.
Now it is never to my mind a good outcome where you have a large amount of redress and compensation being paid, it would be obviously better were that not to have happened.
The fault for that lies with the banks. We have been very consistent in making sure that customers to the greatest extent possible are put right, recognising that financial compensation doesn’t address all the emotional hurt and difficulties that some people have experience through the mistreatment by the banks.
DONAL O’DONOVAN:Do you think it had any impact – that idea that tracker mortgages which were great for people who had them – were characterised as a problem - as problematic. They weren’t problematic the people who had them, they were problematic for the banks because the interest was low on them.
Do you think it had any impact – that characterisation of trackers as a problem that time?
ED SIBLEY: I genuinely don’t. And even if it were the case, I don’t think it would be any excuse for the behaviours that we’ve seen.
DONAL O’DONOVAN:And following in from that. The Central Bank has a dual role in an issue like that – that at that time were a drag on the financial viability maybe of lenders - but were something quite different for consumers. Having those two roles, consumer protection and financial regulation, and being responsible for the well being of the financial system it seems like were in conflict, that they were fighting with each other as roles. That maybe those roles were in contention at that time. Is there an argument for taking consumer protection away from the Central Bank?
ED SIBLEY: So, personally I think probably the most important aspect of my role is the consumer protection role.
The bulk of what we do in prudential supervision is aimed, certainly when we talk about the domestic market, is aimed at protecting consumers both here and when you talk about the international firms abroad. If we look at the detriment to people in Ireland of the financial crisis and the failings at that point, prudential supervision and macro-prudential measures have a hugely important role to play in protecting consumer.
So I would see them as being entirely complimentary.
And the work that we do is done in a complimentary way. So we think about – macro-prudential rules is a good example - we try and build more resilience into the system also informed by building more resilience for consumers and learning the lessons of the Crisis.
I think about that very hard in terms of macro-prudential supervision, those four outcomes that I described: business models are only sustainable if you are thinking about the longer term customer proposition and longer term treatment of your customers has to be a cornerstone of it.
Investors, policy holders, depositors, all have to have concerns that their money, their funds are safe, their policies will be paid out and the in circumstances where that doesn’t happen the crisis of confidence that causes, and there’s detriment associated with that.
And we work very hard to make sure that we are joined up in our interaction with the firms that have a high potential impact from a financial stability perspective and a consumer protection perspective I’m sure we’ll got on to more normal times but in my entire time in the bank we have tried very hard to make sure that that is done in a very joined up in a way that I don’t think you could do with two separate agencies.
DONAL O’DONOVAN:And you don’t think they are in conflict? As the regulator you also, you licence a bank to go and do its business and a consumer who feels that they have a been badly treated by a licenced entity, you don’t think there is a conflict there?
ED SIBLEY: I genuinely think they are complimentary.
So take the authorisation process, we go through that, we’ve gone through that a lot recently. We would have those that are being led from the prudential side we would have our colleagues from conduct, consumer protection in the room as part of the authorisation process so that when we are looking at these things we are making sure that, actually, this does stack up both from a prudential and from a conduct point of view.
There are lots of different models to approach financial regulation around the world I don’t think there’s a right one. More than model has been successful over time, more than one model has failed.
I think that the nature of the organisation here and the jurisdiction, I think this one works pretty well – not perfectly – but pretty well and we do work hard to make sure we are joined up.
DONAL O’DONOVAN:The other consumer protection conversation or criticism at the moment is the price of borrowing – the price of mortgages particularly. Mario Draghi said that the price was a function of having a quasi monopoly in Ireland.
Do you think there’s a quasi monopoly in Ireland, do you think he is right?
ED SIBLEY: I think there is certainly still dysfunction in the mortgage market in Ireland and if one thinks about what one would expect a functioning mortgage market to do...
So, we would expect there to be risk based lending – pricing according to risk to be present, good amount of choice, a relatively high degree of market discipline and clear contracts, strong consumer protection and a degree of stability and certainty about the legal system.
I think in each of those areas one could say there are problems, but in each of those areas I’d also – or many of those areas – you could point to some improvements as well.
I think that then, you can then see how that is playing through into the mortgage market today.
The level of dysfunction in the mortgage market is reduced, so if you go back two or three years I think there wouldn’t have been a lot to choose between the offerings of the different banks both in terms of price and products. I think if we look today, I think the lowest rate is around 2.3pc for a relatively short term fixed – I think it is in or around that - I think it is a little under 3pc for a variable rate and there’s differences in there around loan to value, there’s elements of risk based pricing.
You can choose to fix for a relatively short term out to - 10 years is about the longest - I person ally would like to see much longer - but we can see more differentiation.
I think there is an issue with back book front book pricing, I would like to see more switching.
When I hear bank talk about putting their customer first and all this kind of management speak about their customers and then I see that they have put a percentage point or more between back book and front book I’m very sceptical that they truly mean what they are saying in terms of their customers.
So I would firmly urge all those mortgage holders who have already been though the process once in terms of having taken out a mortgage to be looking at what’s available to them, how much money they would save by switching and we’ve done lots of work there to enhance the information provided about the products that are available to them and how much they can save.
So that market discipline is improving a bit, I think, because there is more choice and there is, if we look at comparisons, which is what the concern is in Ireland, there are different things at play relative to the likes of Germany, France and other countries which don’t have the same level of loss history.
DONAL O’DONOVAN:Because the banks will say that they are not operating as a cartel and there is competition but that pricing is a function of the risk weighted asset.
ED SIBLEY: I think I would certainly agree that the pricing has to reflect the risk and we’ve made choices implicit and explicit in the country around what security means.
If lending isn’t truly secured then you’d expect pricing to be different than in jurisdiction where security can be realised more quickly or indeed in some jurisdictions where there’s typically insurance and some jurisdictions where they have very long term fixes say 20 plus years where the risk profile of those loans is different.
So there are lots of reasons why pricing in Ireland is different and higher than the European average but there are still areas that we continue to focus on. We continue to focus on addressing non performing loans in a way that ensures consumers are protected to the maximum effect but that the system is resilient enough; and Brexit which we talked about earlier; demonstrates the importance o a resilient system.
DONAL O’DONOVAN:You mentioned whether things are truly secured – there is a difficulty in the amount of time that a bank has in repossessing a house where nobody’s paid the mortgage in five years – if that’s the case that seems on the surface to be an extraordinary situation. Is that really the situation, is the mechanism for recovering a mortgage broken?
ED SIBLEY: Elements of this are choices that the country makes. So the legal system that is in force in Ireland is ultimately a choice for, ultimately, the political system and the electorate. Although its quite convoluted how you get there, ultimately, that’s a choice that the country makes.
Relative to other jurisdictions it does take a long time to effect security in Ireland and in some cases it is very, very, difficult.
And that I think is reflective of history and other factors and we will have views on aspects of legislation and we are asked about them.
DONAL O’DONOVAN:I’m not sure that would have been the case if you had repossessed a house 30 years ago – something has changed there – because the contract that I have says if I don’t pay my mortgage it can be repossessed?
ED SIBLEY: Certainly from my perspective – I am living in Ireland I will live in Ireland for the rest of my days, but certainly my experience from the UK is if you stop paying your mortgage you ‘ll lose your home and its relatively quick.
And if we talk to most of our European colleagues – not exclusively not everyone – but most – we are reporting statistics on loans that are two years, three years, four years, five years passed due. Most countries don’t report on that because they don’t have them because that isn’t the nature of how distressed loans are dealt with so there clearly are some elements there that affect how one thinks about security in Ireland.
But I would also say if you look at how mortgage arrears have been dealt with in Ireland, the vast, vast, majority has been dealt with through engaging, giving people time to recover from whatever shock has hit them, restructuring where it makes sense to do so and so on.
So if we look at the numbers, and I’m always conscious with using – with going to the numbers – behind each number there is a person - but at a broad level we have over 100,000 restructured owner occupier mortgages in the system.
Since 2009, really from the onset of the crisis there’s been in the order of about 9,000 cases of loss of ownership and about two thirds of those have been through the handing back of the keys, the voluntary surrender or voluntary sale.
So only – I use that word advisedly – but about 3,000 have been repossession through the court process. So for those borrowers that have engaged and continued to try and engage, to do the right thing to make sacrifices, they have been met with a willingness to restructure and if that hasn’t been the case there are other avenues, structures, supports within the State that go beyond a lot of other jurisdictions.
The CCMA, code of conduct for mortgage arrears, that we have, I think would stand up to scrutiny against any other comparable country in terms of protections that are in place for borrowers.
There are lots and lots of protections in there – there’s the courts system and the time it takes, so there’s lots of time for borrowers to try and get back on their feet.
Then there’s the likes of mortgage to rent, the insolvency service of Ireland, there’s lots of options there.
So I would urge anyone who is in difficulty to engage, knowing that that can be difficult.
But ultimately if we want a secured lending market – which ultimately we clearly do given the concern around pricing - then that security has to mean something at the end of the day.
DONAL O’DONOVAN:The other big problem in the financial system has been around insurance. Passporting of insurance is a relatively new phenomenon and has gone too badly wrong in too many cases for it to be a coincidence.
We’ve had Setanta, Qudos and Enterprise, we’ve had people who paid their insurance, who’ve taken out insurance with regulated entities finding themselves with had no insurance through no fault of their own.
That’s a regulatory failure around passporting in particular – because that hasn’t happened with domestically licenced insurers?
ED SIBLEY: I mean, that’s not entirely true, we have had failures of insurance firms authorised in Ireland.
Last year we had CBL – New Zealand parented but Irish authorised.
There is a single market for insurance in the same way as there is a single market for banking.
What we haven’t to date in Ireland has is much cross border competition in the banking market – certainly not through branches and freedom of service.
There were big problems in that area leading up to the crisis and as a result of the crisis and as a result of the catastrophic failures in the banking sector internationally and a sovereign debt crisis and so on that resulted in banking union. So the crisis ended up with that.
We have similar weaknesses in insurance that were present previously in banking.
So we have the single market but we don’t have a standard compensation scheme that works across the EU, and we don’t have a consistent approach to recovery and resolution of insurance firms so there is a part of the infrastructure at a European level that isn’t where it need to be, to my mind.
There is lots of work being done through the European supervisory authority Eiopa to increase convergence to work to enhance supervisory standards across the EU.
We are very actively involved in that and support peer reviews and the general thrust of convergence and that is having some success but there are certainly historical issues that have come to light in terms of Setanta and indeed in terms of engagement with Gibraltar where that convergence wasn’t sufficient – the standards – the outcomes being achieved were not as we would expect.
But there will also always be failures. We are not a zero failure regime. There is a lot of benefit to having cross border provision of financial services and we are both home and host.
There’s a large amount of insurance that is written from Ireland internationally and there is a smaller amount of insurance that is written internationally into Ireland.
And again to go back to Brexit one of the issues or risks arising from Brexit is that those firms currently providing services into niche areas or relatively small pockets of the market will decide that they are no longer going to provide them. So supply of services will be reduced certainly as a result of a hard Brexit.
So there are benefits to the consumers of having a functioning single market for insurance, but it is not entirely without risk.
Now, when things go wrong it’s really important that policy holders and claims are protected and there is certainty around them.
That was the case with Qudos I think, it wasn’t the case with Setanta and so there has been work done to address some of the issues that were at play with Setanta in terms of pay out, people being put right for policies they d taken out with Setanta.
I don’t think that’s the case with Qudos but that doesn’t rule out something like that happening in the future.
We work with the European system to ensure that we understand as best we can what is written into Ireland and where there are issues they are dealt with in am way that protects consumers as best they can, but overall I think there are benefits.
DONAL O’DONOVAN:You mentioned Gibraltar. Are there jurisdictions that you think there should be a health warning, that consumers should know that maybe the regulatory standard isn’t has high as Ireland for any financial product?
ED SIBLEY: Anywhere within the EU plays by the same rule book, which is a starting point.
The slightly trite answer would be to put it back onto consumer – which I don’t think is right – the consumer should have confidence in products that they buy. What I would say – in the conversations I would have directly with people – know who your insurer is, know where they are from, try and – this is slightly more difficult but try and understand what compensation scheme they have.
One of the issues we have with insurance is it is very commoditised so people look only at the price, whereas within each insurance product there are different services that you are being offered maybe they’ve come abroad, maybe they are Irish maybe they are covered by the Irish compensation scheme, maybe they are not?
So I think its important for consumers to understand where they are buying from. We do all operate to the same rule book, we are trying to enhance convergence there are still some areas where things are not exactly the same across the EU, as they are for banking
DONAL O’DONOVAN:If that was true for food it would be a massive scandal. If you had to wonder is my Belgian pork up to EU standards or had to wonder is this milk English or Irish, it wouldn’t be regarded as acceptable to say ‘well you should have a quick look and see where its coming from’, is there a responsibility on Central Banks to insist that a product has ‘This product is covered by the Irish compensation fund’ written in big bold letters.
ED SIBLEY: We have taken action to make sure its clearer where this insurance is being written from, so I’m always open to look at can we do things that make things more clear and help consumers.
There is always a little bit of this that’s - if you think about the terms and conditions you get on your iphone upgrade and how many people actually read them or just click through them - so there is this disclosure aspect that almost abdicates responsibility on the person disclosing.
So I’m always open to review where we could do more but I think it’s as much trying to make sure the single market work s well and continues to improve and that s very much our mission when it comes to Eiopa.
We invest a lot of time in it to try and enhance convergence and when things go wrong or look as though they are at risk of going wrong then we engage with the home authority, we engage with Eiopa.
They set up platform calls for all countries potentially impacted and we do a lot of work behind the scenes to reduce the risk - to get firms to run off their book if we are concerned that there are problems emerging.
So there are lots of things that we are successful at which no one ever sees – which is right – unfortunately there are always going to be failures and in those cases its about as much as we can do to mitigate the risk to consumers.
DONAL O’DONOVAN:In terms of yourself obviously there’s a lot of change going on in the world and a lot of change at ECB level. Philip Lane is going, he’s going to leave the bank in a couple of months.
You are Deputy Governor, if there is a vacancy for the Governors job will you go for it?
ED SIBLEY: So, I think there’s still a little bit of process to go through in terms of the Governor’s appointment with the European Parliament.
Assuming that all goes ok, and I’m sure, we’ll find out later this month then yes, you are right, there will be a vacancy here.
I’m not interested in it.
I’m genuinely committed to the role I have here. I hope to be in this role for a long time. I have a five year contract, it can be rolled over for another five years if whoever the new Governor is likes the cut of my jib, and we haven’t had a large failure on my watch, I would like to continue to do it for the long term and the Governor role isn’t for me.
DONAL O’DONOVAN:And what is the process to appoint a new Governor?
That is very much with the Department of Finance and the Minister, so there will be, as I understand it, an open competition and I think its the Minister for Finance makes a recommendation to the President ultimately.
So its not for the Central Bank, within the bank, albeit our board or a member of our board is involved within that interview process.
DONAL O’DONOVAN:And Philip Lane going to the ECB, the first time an Irish person has been on the executive council. Does it matter?
ED SIBLEY: So I think it’s a tremendous endorsement of the strength, intelligence and work of Philip Lane over a long number of years and the respect that he’s held in at a European level and all that he has delivered.
And I’m fortunate enough to be with him in Europe and internationally and as I said, the respect he is held in, the esteem he is held in, based on his capabilities and the work he has done is very, very, high.
So as I said I think it is first and foremost great recognition for that at a personal level but it is also, I think a recognition of where Ireland has come from and too.
The general respect the Central Bank is held in, the work we’re doing in terms of building trust across a wide spectrum of areas. the fact that we’ve been are at the forefront of a lot of really important measures like the macro-prudential measures and lead the way and contributed very strongly in European international forums is a positive from that perspective. And clearly its positive having someone so familiar with Ireland in such a position of influence and authority.
On a slightly less positive note clearly a loss for us in terms of his day to day leadership and the capabilities he shows here within the bank.
DONAL O’DONOVAN:Yourself - you are in Frankfurt a lot, you’ve obviously got an English accent. Is that becoming a lonely place for a guy from your background?
I suppose that’s question A and then how did you end up here?
ED SIBLEY: There’s lots and lots of accents in Frankfurt. I’m fortunate that the ECB language is English, so that helps me as a native speaker. But I am actually genuinely looked at as from Ireland when I’m in Frankfurt or indeed in London when I’m at the European Banking Authority or in other international fora and I’m very much am at home in Ireland.
I lived here from 1999 to 2007 and then I moved back to London for five years and came back in 2012. My wife is Irish, my children are Irish, I intend to be in Ireland for the rest of my days so, i feel as though I am committed to serving the Irish public through the work that I do. I do take a European view, as we are expected to do, in terms of the discussions we have in the European fora but I’m very much taking the European view informed by the Irish position or my position in terms of what’s good for Ireland.
DONAL O’DONOVAN:Personally, watching Brexit from afar but not that far, what’s your impression, you are English – it’s a famously stable country that’s stopped being stable, it feels like?
ED SIBLEY: So, I have to be slightly careful. From a post perspective I’m apolitical although it can be difficult to talk about Brexit and the politics of Brexit and maintain that stance.
Personally I am deeply saddened by it. I think it is entirely regrettable - albeit understandable in some respects – I think it is to the detriment of the UK and to the detriment of the EU and its really unfortunate that Ireland is going to suffer collateral damage as a result.
DONAL O’DONOVAN:One final thing - there wasn’t a big fuss this year in the banks’ annual results around bonuses and bonus caps and pay caps partly because there's something coming down the track from the Department of Finance, the review underway that Paschal Donohoe asked for. The pay cap doesn’t apply at all banks, in fact most financial institutions aren’t affected, first of all have you guys been asked to contribute to the review and the do you have a view on the caps?
ED SIBLEY: We have been consulted on the review and there has been some engagement at official level though I’m not directly involved in that, but there has been some engagement.
There was a lot of work done after the crisis looking at incentivisation and pay - so under regulations applying at a European level and also the European Banking Authority standard - to address some of the risks associated with short term incentives that were fairly typical of the pay structures before the crisis - so cash only, no claw back, focused on performance in any given year or time period as opposed to long term risks.
So the issue is that some of the risks associated with what we saw pre crisis have been mitigated - not entirely - but again I’ve said this publicly - I think its fine to have variable incentives to incentivise people. I mean there’s no bonuses paid in the Central Bank of Ireland and the approach to pay is very rigid, but there are lots on incentives that are at play in the Central Bank like any organisation., in any organisation people are incentivised whether there are bonuses or not, and what we are very keen on is that whatever incentives are at play - monetary or not - they are consistent with good governance, long term success of the firm fair and correct treatment of the firm’s customers.
So as long as those criteria are met, then ultimately, whatever pay structures are used are consistent with the culture and behaviour we’d expect of a firm then I think its fine and in fact there are some advantages to having a variable pay element both in terms of how people are incentivised but also in terms of having a degree of capability of reducing the cost base in the event of a downturn. So on that basis - in terms of the absolute amounts I think that is ultimately a matter for the shareholder and there are trade offs there, so a cap of half a million euros – that’s a lot of money, it’s a large salary but clearly there are people who operate as CEOs who expect to be paid more than that - so its a trade off between - well the candidates that can be got within the cap and those candidates that can’t.
I think perhaps another thing to think about is, when you go down the layers and the levels, can the domestic banks that are subject to the pay caps, can they recruit the staff that they need to run the banks safely? And there is more competition in the market partly as a result of Brexit for certain types of skills.
But at a headline level I think its up to the shareholders.
DONAL O’DONOVAN:So what I’m getting from that is you don’t think there is a competence crisis caused by having a pay cap, for instance?
ED SIBLEY: No, I don’t think so.