The measurement and regulation of shadow banking in Ireland
| DOI | https://doi.org/10.1108/JFRC-02-2017-0019 |
| Pages | 396-412 |
| Published date | 13 November 2017 |
| Date | 13 November 2017 |
| Author | Jim Stewart,Cillian Doyle |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
The measurement and regulation
of shadow banking in Ireland
Jim Stewart and Cillian Doyle
School of Business, Trinity College Dublin, Dublin, Ireland
Abstract
Purpose –The purpose of this paper is to study financial vehicle corporations (FVCs) and other special
purpose vehicles(SPVs) in Ireland.
Design/methodology/approach –The paper is based on a database of FVCs thatare a central part of
the shadow banking sector in Ireland.The database is derived from a European Central Bank (ECB) list of
securitiesand from filings in Company Registration Office, Dublin.
Findings –Tax concessions are very valuable and has resultedin zero or close-to-zero effective tax rates.
Although described as “bankruptcyremote”, FVCs/ SPVs in Ireland are associated with several banks that
failed. Central Bank dataare inconsistent with revenue data and have resultedin regulatory gaps. The main
economicbenefit to Ireland consists of payments to certain serviceproviders.
Research limitations/implications –A complete population of FVCs/SPVs has not been used.
Ownership of FVCs/SPVs has not been identified with consequent implications for identifying risk to the
sponsoringfirm or guarantor.
Practical implications –The study indicates data deficiencies in Central Bank data, with consequent
implications for regulationand measuring the size of the shadow banking sector, and failureof FVCs/SPVs
describedas bankruptcy remote.
Social implications –The shadow banking sector has been a key source of instability and risk
transferencein the recent past. Research and understanding is vitalto prevent a future occurrence.
Originality/value –There are no publicly availabledatabases of individual FVCs/SPVs in Ireland. Hence,
research on granulardata is limited. The study develops a database derivedfrom lists of securities published
by the ECB. Thestudy also relies on a database derived from company houserecords.
Keywords Ireland, Regulation, Tax incentives, Shadow banking, FVC/SPV
Paper type Research paper
1. Introduction
Since the Great Financial Crash, shadow banking and its regulation have become a key
concern of policymakers(Financial Stability Board, 2015, EuropeanCommission, 2013).
Financial vehicle corporations (FVCs) are a large part of the shadow banking sector in
the Eurozone. Ireland’s shareof euro area FVC assets has varied between 21 and 24 per cent
over the period 2010-2015, and amountedto e431.1bn the end of 2015.
This paper is a study of FVCs and some other special purpose vehicle (SPVs) in
Ireland. The study is limited to FVCs and SPVs that avail of special tax concessions
(“section 110”of 1997 Finance Act), and are widely referred to as “section 110”firms.
There were 2,480 such firms in 2016[1].SPVsarewidelyusedinthebankingand
financial sectors, but are also used to transfer assets, avoid tax and provide legal
protection (PwC, 2011, p. 2). Hence, the number of SPVs incorporated in Ireland is likely
to be a multiple of “section 110”firms.
“Section 110”SPVs also include firms involved in financingreal assets. Aircraft leasing
in particular has benefitted from “section 110”as well as other incentives so that one
estimate is that half the world’s aviation fleet is managed from Ireland[2]. The use of
JFRC
25,4
396
Journalof Financial Regulation
andCompliance
Vol.25 No. 4, 2017
pp. 396-412
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2017-0019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
“section 110”companies is likelyto grow in future years to include other capital assets such
as wind farms.
The European Central Bank (ECB,2008)definesan FVC as a firm that “intends to carry
out, or carries out, one or more securitisation transactions and is insulated from the risk of
bankruptcy or any other default of the originator”.For this reason, FVCs in Ireland are often
described as “bankruptcy remote vehicles”. The Financial Stability Board (2015, p. 51)
defines FVCs as “bankruptcy remote securitisation vehicles funded through the issue of
marketable securities”.
Developing the securitisation industry is a long-established policy of the Irish State
(Department of An Taoiseach, 2000, p. 11). Favourable tax provisions to encourage
securitisation were first introduced in 1991 but limited to those firms located at the Irish
Financial Services Centre, Dublin (IFSC) (Godfrey et al.,2015,p.49).“Section 110”of the
Taxes Consolidation Act 1997 conferred these advantages on all FVCs (including those
located outside the IFSC)[3].
Most FVCs act as financial inter mediaries –that is, they buy and sell various types of
financial assets[4]. Althoughsome firms classified as an FVC by the Central Bank of Ireland
(CBI) are not financial intermediaries, but rather have been used to raise funds to purchase
distressed assets, on behalfof firms such as Cerebus, Lone Star Capital, and Blackstone. The
range of activities undertaken by firms that may benefit from “section 110”has been
substantially extended since 1997. This means that many SPVs availing this incentive are
not classified as FVCs in ECB statistics.
All FVCs and firms established using “section110”in Ireland, are incorporated under the
companies Acts and are required to file documents, including company accounts, in
Companies RegistrationOffice (CRO) in Ireland. This paper used data published by the ECB
to identify individual FVCs and thus to access accounts[5]. In addition, SPVs, sometimes
referred to as special purpose entities (SPEs), established using “section 110”provisions
were also identified insearches of CRO and Irish Stock Exchange (ISE) filings.
The vast majority of FVCs in Ireland are owned by a charitable trust (described as
an “orphan”structure) have no subsidiaries, fixed assets or employees. However, in
some cases, the accounts may be consolidated into a banking group. Even though they
may be large with over e1bn in gross assets and have large gross income, they pay very
little in corporate tax.
“Section 110”SPVs engaged in activities, described as fulfilling “narrow, specific
purposes”, were also required to report to the CBI since 2015 (Barrett et al., 2016a,2016b,
p.1). As shown later, “section 110”SPVs connected to Russian firms, all acted as an
intermediary in raisingdebt which was used to provide a loan to a specific Russian firm. As
in the case of FVCs, securitisation may also be the primary function of “section 110”SPVs.
Hence, it may be difficult in practice to distinguishbetween those firms classified as an FVC
compared to a “section 110”SPV.
The paper shows that despite the ECB prescription that they should be “insulated from
the risks of bankruptcy”, many of the banks thatincurred large losses in Ireland, the UK and
Germany, in the financial crash,were found to be connected to FVCs incorporated in Ireland,
organised as “section 110”firms. This pattern is repeated more recently in relation to SPVs
connected with Russian Banks. Very few of these SPVs is classified as FVCs (in CBI/ECB
data up to 2015).
The paper argues that the data published by the CBI/ECB on the populationof FVCs in
Ireland and more recently SPVs appears inconsistent with the total number of SPVs
authorised by the revenue in Ireland. Furthermore,the CBI/ECB data appears to omit many
Measurement
and regulation
of shadow
banking
397
To continue reading
Request your trial