Mr. Ed Sibley:

I have a flight to catch. I thank the committee for the invitation to discuss the recent Report on Local Public Banking in Ireland. I am joined by Mr. Patrick Casey, the Registrar of Credit Unions, and Ms Anna Marie Finnegan, head of policy in the registry.

I will address three topics that intersect between the scope of the report and the work of the Central Bank. First, I will provide an overview of the process for bank authorisation. Second, I will outline developments in the provision of credit to the SME sector. Third, I will discuss the regulation and supervision of the credit union sector.

Since 2014 the ECB has been the competent authority for the authorisation of banks in Ireland and across the eurozone. This means that applications for bank authorisation are dealt with in a consistent manner across the entire eurozone.

In practical terms, the national competent authority in Ireland, is the Central Bank of Ireland and it assesses applications in consultation with the ECB prior to a recommendation being made whether to approve the application or not. To this end the Central Bank of Ireland has dedicated authorisation teams following processes that are transparent, predictable and consistent. The assessment of an application will consider the financial resources the firm has available to it, the sustainability of its business model, governance and risk management arrangements and its ability to recover if it gets into difficulty. Applicants that can meet the requisite standards in these areas will be approved.

Turning to SME's, the Central Bank of Ireland understands the importance of SMEs to the Irish economy. Small and medium enterprises account for the vast majority of active enterprises by number and employ about two thirds of the Irish workforce. In Ireland the majority of SME investment is financed through internal funds. For external financing bank lending and leasing are the two largest sources of funds. In recognising the challenges faced by the SME sector, the Central Bank of Ireland has issued regulation aimed to strengthen protection while also facilitating access to credit.

The provision of credit to SMEs in Ireland was undoubtedly severely impacted by the financial crisis. Total credit outstanding to non-financial, non real estate SMEs stands at €16.2 billion as at quarter 1 2018, which is significantly lower than it was at peak. Default levels remain high at 23% of total loans outstanding and three banks have a market share of 87% of all new SME loans issued in the first quarter of 2018. This concentration together with the high historic levels of default in Irish SME lending are contributory factors to interest rates for Irish SMEs being higher than average interest rates for SMEs operating in other countries in the eurozone.

New bank lending is recovering and has risen from €2 billion in late 2013 to €3.75 billion as of the first quarter of this year. This recovery has been broad based across industrial sectors but two sectors are predominant, agriculture and wholesale and retail trade, and they account for 42% of new bank lending into the SME sector.

The credit market has shown a reduction in the SME application rate for bank financing since 2012 until 2017, but has stabilised and started to recover somewhat since. The market for financing is most common among medium sized firms and lowest among micro sized firms, that is those with fewer than ten employees. The rejection rates have declined from March 2012 to March 2016 and have stabilised in 2017 and 2018, but are still higher than European averages. Micro firms experience significantly higher rejection rates than other SME types.

The establishment of the Strategic Banking Corporation of Ireland has provided a further source of funding to Irish SMEs. Total loans drawn down from inception to end of March 2018 stood at €952 million. There are also a range of asset based financing firms, peer to peer lenders, invoice discounters, leasing firms and other types of non-bank financiers that have entered the domestic market in recent years.

Credit unions play an important role in Irish society and in the financial system. The role and ethos of the sector reflect the primary objectives and purpose of credit unions to promote thrift among their members and the creation of sources of credit for members' mutual benefit at fair and reasonable interest rates.

Our role in respect of credit unions is reflected in our statutory mandate to regulate with a view to ensuring the protection by each credit union of the funds of its members and the maintenance of financial stability and the well-being of the sector as a whole. The Central Bank of Ireland is supportive of further developments of credit union business models. The consolidation and strengthening of the sector has seen improved standards in the running of credit unions and their financial resources but further progress is required on embedding governance, risk management and operational capability. The emergence of larger and more sophisticated credit unions presents additional opportunities. Credit unions are already permitted to provide commercial loans but are not currently particularly active in this type of lending. The Central Bank of Ireland will be very shortly consulting on proposed changes to the lending framework for credit unions and the proposed revisions also provide increased capacity to engage in both home mortgages and commercial lending for those credit unions with the financial strength, competence and capacity to do so. Should credit unions wish to become involved in a local public banking model, they will need to ensure the continued protection of members' funds and comply with legislative and regulatory framework that applies to credit unions.

I hope my contribution has been useful in terms of the topics the committee wishes to discuss.