Irish Regulatory Reform: The Central Bank today outlined a radical overhaul of financial regulation with a new Central Bank as a unitary organisation with responsibility for both regulation and oversight of banking in Ireland: at an individual institution level ("micro-prudential") and at a system-wide financial stability level ("macro-prudential").

The Central bank outlined the new system in a paper, Banking supervision: our new approach, and said that while a strong legislative base provides a cornerstone for building a strong independent body, the manner in which the organisation is structured, managed and staffed is key to delivering on its responsibilities. The appointment of senior executives with responsibility for Financial Institutions, Risk and Policy, Enforcement, Markets and Consumer Protection will strengthen the executive management and enable the Bank to restructure the directorates and departments which are most directly involved in banking supervision.

This in turn will allow the Bank to overhaul the system of banking supervision taking account of the lessons learned from the financial crisis, both domestic and international, and to keep pace with international best practice.

Key changes in structure which most directly impact on banking supervision:

• The two frontline banking supervision departments will be restructured as Retail Banking and Wholesale Banking in a move away from a division purely based on "covered institutions" (i.e. those covered by the Credit Institutions (Financial Support Scheme) 2008) and other banks. This creates a new business as usual structure, grouping banks with similar models and associated risks within the respective departments.

• A new team, Prudential Analytics, containing quantitative specialists, financial analysts and business model analysts will support supervisors. This new team, together with the ongoing recruitment of specialist staff for banking supervision departments and the establishment of a Risk Experts Panel will address the lack "of some of the specialised expertise needed" as noted in the Honohan report.

• A dedicated Enforcement Directorate will have investigative expertise and deliver a credible threat of enforcement action. The need for credible enforcement and the consequential benefits were outlined in the Honohan report: "When a new agency is created it is important that it quickly establishes its credibility and reputation as an enforcer. This creates expectations as to how the rules, codes, regulations and principles will be enforced which will, in turn, influence behaviour. If the regulated firm anticipates prompt regulatory action if it infringes a principle, code, rule or regulation and also that the action will increase in severity if it is repeated, the regulated firms will strive to minimise such infractions".

• The Policy and Risk Directorate addresses the need to overhaul the domestic framework for regulation in line with international recommendations and best practice, better monitor and influence EU and international policy proposals and implement EU legislative changes into the system of supervision. Responsibility for the development and maintenance of the organisation-wide Risk Assessment Model will be centralised in a Risk Department. The establishment of dedicated policy departments also recognises the impact on frontline supervision when resources are diverted to policy and other support functions. The Honohan report noted that in banking supervision "management resources were regularly diverted from day-to-day supervisory tasks to deal with policy development work and work related to the Committee of European Banking Supervisors (CEBS)" and that "key staff were diverted into activities such as the implementation in Ireland of the many new and technically demanding international requirements introduced over the period and participation in various EU and ECB groups".

• Later this year, following preparatory work on the Bank's information systems, the Bank will establish a Regulatory Transactions Department where all processing of regulatory returns and routine regulatory transactions will be centralised with common risk-based processes and, over time, a common work flow IT platform.

Recruitment

The Central Bank plans to recruit 150 extra staff this year, bringing overall staff there to 1,300. It also plans to increase regulatory staff by as much as another 200 over the next two years.