Mr. Gerry Cross:

To echo Mr. Gilvarry's comments, there is a large degree of convergence of view between the Central Bank and Department. The latter is in the lead on the negotiations and we provide our advice and views. It should be noted that this is a process and as the discussion proceeds, the perspective of the Central Bank is informed by the Department and vice versa and a convergence of view has taken place in many respects.

On the Deputy's specific question, Pillar 2 is in place to allow supervisors to complement the Pillar 1 capital requirements. Pillar 1 is basically where the directive sets out how to calculate the charge for credit risk, liquidity risk and operational risk. It sets out how to calculate the amount of capital a bank needs and this is fixed and non-discretionary. Pillar 1 provides that although Pillar 2 takes us a long way, it only takes us so far and we rely on supervisors being able to implement what is, in the post-crisis environment, a significant supervisory process in respect of firms and take the appropriate measures. This may mean stating that the bank in question requires more capital, as is often the case, needs to beef up its systems and controls in a certain respect or must change its personnel in certain areas. A whole range of things are needed. This is essential for the Central Bank. Speaking globally, one of the things that went wrong in the run-up to the crisis is that supervision had become etiolated as a force in terms of ensuring the soundness of the system.

Pillar 2, namely, the ability to apply supervisory judgment and require more, is very important. For this reason, the Central Bank is a little uncomfortable when we see a proposal which, while not fully undermining this ability, nonetheless seeks to constrain it. For example, whereas previously there was a fairly open list in terms of the powers we have and the measures we could take, the effort now is to make this a closed list of areas of engagement. For example, the catch-all power to require measures or capital where risks are underestimated by Pillar 1 is removed in the proposal. We are not comfortable with this narrowing of the way we can approach matters because things change, risks emerge and profiles are different.

In addition, a requirement in the proposal provides that banks make the initial determination as to what should be the composition of their Pillar 2 capital. In the view of the Central Bank, this is our decision to make, in other words, we should require that if there is a Pillar 2 charge, it should at least reflect the Pillar 1 composition.