The measurement and regulation of shadow banking in Ireland

Author:Jim Stewart, Cillian Doyle
Position:School of Business, Trinity College Dublin, Dublin, Ireland

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 that are a central part of the shadow banking sector in Ireland. The database is derived from a European Central Bank (ECB) list of securities and from filings in Company... (see full summary)

The measurement and regulation
of shadow banking in Ireland
Jim Stewart and Cillian Doyle
School of Business, Trinity College Dublin, Dublin, Ireland
Purpose The purpose of this paper is to study nancial 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 lings in Company Registration Ofce, 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
economicbenet 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 identied with consequent implications for identifying risk to the
sponsoringrm or guarantor.
Practical implications The study indicates data deciencies 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. Irelands 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 110of 1997 Finance Act), and are widely referred to as section 110rms.
There were 2,480 such rms in 2016[1].SPVsarewidelyusedinthebankingand
nancial 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 110rms.
Section 110SPVs also include rms involved in nancingreal assets. Aircraft leasing
in particular has benetted from section 110as well as other incentives so that one
estimate is that half the worlds aviation eet is managed from Ireland[2]. The use of
Journalof Financial Regulation
Vol.25 No. 4, 2017
pp. 396-412
© Emerald Publishing Limited
DOI 10.1108/JFRC-02-2017-0019
The current issue and full text archive of this journal is available on Emerald Insight at:
section 110companies is likelyto grow in future years to include other capital assets such
as wind farms.
The European Central Bank (ECB,2008)denesan FVC as a rm 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)
denes 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 rst introduced in 1991 but limited to those rms located at the Irish
Financial Services Centre, Dublin (IFSC) (Godfrey et al.,2015,p.49).Section 110of the
Taxes Consolidation Act 1997 conferred these advantages on all FVCs (including those
located outside the IFSC)[3].
Most FVCs act as nancial inter mediaries that is, they buy and sell various types of
nancial assets[4]. Althoughsome rms classied as an FVC by the Central Bank of Ireland
(CBI) are not nancial intermediaries, but rather have been used to raise funds to purchase
distressed assets, on behalfof rms such as Cerebus, Lone Star Capital, and Blackstone. The
range of activities undertaken by rms that may benet from section 110has been
substantially extended since 1997. This means that many SPVs availing this incentive are
not classied as FVCs in ECB statistics.
All FVCs and rms established using section110in Ireland, are incorporated under the
companies Acts and are required to le documents, including company accounts, in
Companies RegistrationOfce (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 110provisions
were also identied insearches of CRO and Irish Stock Exchange (ISE) lings.
The vast majority of FVCs in Ireland are owned by a charitable trust (described as
an orphanstructure) have no subsidiaries, xed 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 110SPVs engaged in activities, described as fullling narrow, specic
purposes, were also required to report to the CBI since 2015 (Barrett et al., 2016a,2016b,
p.1). As shown later, section 110SPVs connected to Russian rms, all acted as an
intermediary in raisingdebt which was used to provide a loan to a specic Russian rm. As
in the case of FVCs, securitisation may also be the primary function of section 110SPVs.
Hence, it may be difcult in practice to distinguishbetween those rms classied as an FVC
compared to a section 110SPV.
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 nancial crash,were found to be connected to FVCs incorporated in Ireland,
organised as section 110rms. This pattern is repeated more recently in relation to SPVs
connected with Russian Banks. Very few of these SPVs is classied 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
and regulation
of shadow

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