The Central Bank of Ireland published the annual report for 2020, along with the two research pieces that will help inform its approach to tackling the climate risks. The annual report sets out work done in 2020 as well as the strategic priorities for the coming months. The key strategic priorities involve delivering risk-based supervision through supervisory strategies, enhancing the regulatory and supervisory framework, ensuring the financial system provides services that households and business require, strategically influencing and shaping the regulatory policy, and addressing climate change risks.
The key planned activities under these priorities include the following:
- Focus on ensuring that there is appropriate support for borrowers in distress and that lenders treat them fairly, through consistent processes and in line with relevant codes and regulations. This will involve lenders engaging effectively with distressed borrowers to deliver appropriate and sustainable solutions and facilitate as many borrowers as practical to return to repaying their debt in a sustainable way, while recognizing and prudently accounting for the level of distress in their books.
- Maintain supervisory focus on the financial and operational resilience of firms and markets, to ensure they continue to support households and businesses through the economic disruption caused by COVID-19 and that they operate in the best interests of the wider economy.
- Focus on strong governance and risk management capabilities in firms and markets to improve culture and decision-making and to ensure that the risks are identified, managed, and effectively mitigated, including the risks from disruptive change such as technological and market innovation, as well as climate-related financial risks.
- Achieve progress in a number of key areas such as the EBA stress testing exercises, the annual Supervisory Review and Evaluation Process, the safeguarding of client assets and management company effectiveness, and the development and implementation of appropriate frameworks and policies. Also make progress with preparation for the implementation of the Investment Firms Regulation and Directive (IFR and IFD) to ensure investment firms are supervised in line with this new framework.
- Ensure that firms identify risks or threats to the long-term sustainability of their business models and advance digital and business strategies to support business model sustainability and transformation; also ensure that boards and executives ensure that data aggregation and risk reporting practices are subject to strong Board oversight.
- Enhance the regulation and supervision of firms for climate risk. Central Bank of Ireland wants to see firms well prepared to deal with a rapidly evolving operating environment, including the transition to a sustainable economy.
- Propose introduction of regulations in accordance with Section 48 of the Central Bank (Supervision and Enforcement) Act 2013: it is the view of the Central Bank of Ireland that pre-emptive recovery planning is necessary to facilitate increased awareness and preparedness within firms. Pre-emptive recovery planning will inform strategic decision-making processes during a crisis. Developing a strategy during an extreme stress can limit the scope of the planning, the detail of the review, and the efficacy of decision-making.
- Contribute to and shape the ongoing integration of the single market in financial services and the completion of the Banking Union. Central Bank of Ireland supports the ongoing integration of the Single Market for financial services in the EU based on high quality regulation, supervision, resolvability and macroprudential policy as it will ensure a more effective and efficient functioning of financial markets, delivering better outcomes for the economy, consumers and investors. An important part of this work is developing the Single Rulebook for the European financial system and convergent approaches to supervisory outcomes across the EU.
- Pursue the evolution of the EU regulatory framework in the context of rapid technological innovation. The rapid evolution of technological change in financial services requires a corresponding enhancement of the regulatory framework to mitigate emerging risks and anticipate future ones.
In addition, Central Bank of Ireland announced its participation in the USD-denominated green bond investment fund for central banks, which is established by BIS. The Central Bank of Ireland also published two pieces of research that will help to inform its approach to climate-related risks. One of the research pieces examine the green bond market in Europe. It finds that Irish-resident investment funds hold the majority of green bonds in Ireland. Credit institutions are the second largest holder, followed by insurance corporations. The second research report presents the results of a survey of insurance firms’ exposures to and preparedness for emerging risks, including climate risks. The results provide a number of key insights into how insurers are managing climate risks. Respondents indicated that physical and transition risks are the most material risks arising from climate change, while 11% of firms indicated that reputational risks were a concern. The findings also show that a majority (84%) of firms have management structures in place for oversight of climate risks. However, they also indicate a need for firms to take further steps to fully assess the impact of these risks on their business model, as 54% of respondents indicated they did not have a climate strategy, plan, or policy in place. The results from the survey will inform the supervisory approach going forward.
- Press Release on Annual Report
- Annual Report (PDF)
- Press Release on Climate Change Risk
- Green Bonds Market Snapshot
- Survey on Insurance Firms (PDF)
Keywords: Europe, Ireland, Banking, Insurance, Climate Change Risk, ESG, Strategic Priorities, COVID-19, IFR, IFD, Investment Firms, Green Bonds, Green Finance, Governance, Central Bank of Ireland
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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