The level of international assets housed in tax-efficient companies in the State's financial services centre grew 4.4 per cent in the year to March to €763 billion, as non-bank lenders increasingly use these vehicles to supply credit to the global economy, according to Central Bank data.
The number of so-called financial vehicle corporations (FVCs) – which are involved in securitisation, or selling debt backed by income assets such as residential mortgages – rose by 54 vehicles to reach an historic high of 875 in the first quarter. Other special purpose vehicles (SPVs) increased at a faster pace, by almost 13 per cent in number to 981.
Both types of vehicles, also known as Section 110 companies, are set up under tax-neutral laws enacted in 1997 to make Dublin's International Financial Services Sector (IFSC) a more attractive place to carry out international finance. It is estimated that lawyers, accountants and bankers generate about €200 million in fees from these unregulated vehicles, which largely have very little to do with the domestic economy.
However, the Government moved last year to clamp down on the use of SPVs by so-called vulture funds to hold property loans acquired in Ireland during the financial crisis and claim tax benefits.
The amount of assets in FVCs, which had been required by the European Central Bank to file quarterly data on their holdings and liabilities since 2009 given the role that this sector played in the financial crisis, dipped by €3 billion on the year to €410 billion.
The assets contained in other SPVs, with the Central Bank of Ireland has zeroed in on over the past two years, increased by 11 per cent to €353 billion, driven by an increase in “loan origination vehicles” and vehicles linked to investment funds.
A Financial Stability Board (FSB) report published in May highlighted that traditional banks' have taken a lesser role in the global financial system in recent years, as they face more onerous regulatory and capital requirements. The issue facing authorities globally is making sure that companies and vehicles that have filled the gap are not adding risks to the international system, which may spill over and affect banks and wider economies.
FVCs and SPVs are a key part of Ireland’s so-called “shadow banking” industry, which amounted to $2.2 trillion (€1.9 trillion) of nonbanking financial assets at the end of 2015, according to the FSB report. Still, almost 60 per cent of the industry is made up of investment and money market funds, which are heavily regulated and administered in Dublin.
The latest Central Bank data shows that banks remain the biggest sponsors of IFSC-based FVCs and SPVs, which would include companies set up to hold mortgages that have been securitised and firms set up at arms length to extend loans to businesses.
In terms of country, the US and UK are the home counties of most of the "sponsors" of Irish FVCs and SPVs, with Russia the third biggest location for companies behind the latter type.
