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The ‘deepening roots’ of IFSC banking Back  
Padraig Rushe reviews the IFSC banking sector highlighting the telling developments of its evolution. Rushe takes a look forward at potential areas of excellence in the banking sector including private banking & covered bonds; and within the overall investment funds arena the presence of a licensed in-house custodian bank greatly enhances the service offering from the funds administration sector.
Bank of Ireland International Finance (BOIIF) was established and obtained an IFSC licence during the early days of the IFSC. The initial plan for this business was that it would arrange and participate in cross-border structured transactions and generate fee income as well as cost efficient funding for the BOI group. Soon thereafter the business was expanded and diversified initially into investment grade lending, and subsequently into a variety of other lending areas and markets. The investment grade logic was compelling; asset quality was top tier and even though margins were thinner, with a tax rate of 10 per cent (now 12.5 per cent), the after tax return in the IFSC was very acceptable. Indeed it became obvious that IFSC based banks could actually move up the risk spectrum; take larger bite sizes in transactions and despite the thin margins generate very acceptable returns.
Padraig Rushe

This phenomenon attracted a ‘who’s who’ of global financial institutions to the IFSC. Wisely the IDA, Government bodies and regulators insisted on ‘substance’ being evident in the IFSC and as a result these institutions established highly visible front office operations there, albeit in some cases with the back office operations outsourced to local service providers resulting in the creation of a significant numbers of new jobs.

Over the years activities were broadened and IFSC roots deepened. In a number of cases Irish banking licences were added. Today quite a number of these groups have substantial banking operations here and are actively engaged in developing the Irish as well as the international side of their businesses. IFSC based banks now regularly compete for lead arranger roles in domestic corporate financings; they compete in cash and FX markets and in some cases have established a presence in the commercial and consumer segments.

However it is fair to say that we have seen a massive transformation in the banking environment since the start of IFSC and this has accelerated in recent times.

Corporate tax rates have now harmonized at 12.5 per cent so from a domestic bank perspective the after tax benefit of the IFSC no longer exists. In Bank of Ireland’s case we have long since expanded from our early IFSC beginnings. Anchored in Dublin we now have offices across the globe and have added an array of new international finance activities including project finance, property, media, maritime and asset based lending. Our employee numbers in these Dublin businesses have ballooned from an initial base of 5 people in the early days to now well in excess of 200. We have established new offices in London, Paris, Frankfurt, the US and most recently in Sydney, Australia to further develop these franchises. The catalyst for all of this was the IFSC start up some 20 years ago.

The recent turmoil has severely impacted several global banks leading to massive asset write-downs and resultant losses across investment grade portfolios (and others). The emergence of losses at parent level seriously undermines the benefits to be gained from an IFSC subsidiary. If the losses are actually sustained in a low tax environment the impact is exacerbated.

So what next for the IFSC banking community?

Well, not surprisingly, this very issue is being debated within the industry, Government agencies and other relevant bodies. I don’t believe we need to ready the lifeboats yet but neither would complacency be appropriate.

We have witnessed a considerable evolution already within the IFSC in this sector. For instance in very recent times some large R&D projects have been sponsored by IFSC banks employing significant numbers of highly skilled people. There is certainly scope to build on this success, something IDA Ireland is actively pursuing. The corporate world has also helped to drive innovation in the sector with some major multinational firms having secured banking licences for their IFSC businesses. Perhaps an opportunity exists to develop this product further in the times ahead.

We have also seen the benefits to be derived from the covered bond legislation and every reason to anticipate that the recently proposed changes to the legislation will benefit the sector and attract further participants.

Private wealth management firms are also on the rise and these firms can and do benefit from the reputation and regulatory ‘status’ afforded by a banking licence. Indeed within the overall investment funds arena the presence of a licensed in-house custodian bank greatly enhances the service offering from the funds administration sector. Ireland has much to offer in this regard.

We have a modern, professional and highly reputable regulatory infrastructure here. The IFSC has for the most part been built on this ‘rock’. I can see no reason why, despite current market conditions and any resultant set backs, we can not continue to innovate and develop our banking sector in the above and other areas.

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