A quick reading suggests that Irish companies law sets out priorities for creditors and that this multi-repeated pari passu is true if the creditors do rank equally but not if they don’t. Quelle surprise. For instance, it seems to me that clause 285 of the same law does that, giving priority to things like unpaid wages and taxes before other creditors get paid. However, it’s hardly relevant since it doesn’t mention banks.

On the other hand, S.I. No. 168/1995 does mention banks, and seems to define “eligible deposits” in a way that covers how a bank liquidator should act.

Is that the relevant act in Irish law?

Section 10 and 11 seem to be particularly relevant, and seem to define what’s then to be considered as a balance available for creditors under the Companies Act you quote earlier, i.e. once “eligible deposits” as defined in section 16 are paid, the rest can be apportioned according to the Companies Act.

It is - as usual with Irish statute - a bastard to read so I may well be misreading it. That’s a good possibility, because after three or four times cross referencing different subsection (a)s and (b)s and trying to sort out all the double negatives my eyes start to water, but things like Certificates of Deposit and Interbank deposits seem to be excluded.

As I say, quite possible I’m misreading it, but since you and Eoin are such experts you’ll surely set me right. I just hope you’ll do it with grace and courtesy.

@Eoin.
If you don’t want to engage in slagging matches, don’t start them.

We need to know whether our systemic banks are dancing when the next game of musical chairs starts.

My instinct, based on comments that Brian Lucey made in the past, is that, the 2008 crisis wasn’t severe enough to bring about a radical enough shift in political awareness, to the points you mention. I am a bit indifferent to it to be honest. But in my own psyche, what I am trying to do at the moment, is to psychological brace myself for a complete repeat performance of the 2008 in Ireland. The exact same thing. Except that in 2020, no one will bother to even reach back in their memories to remember Anglo Irish bank, Liam Carroll, Bernard McNamara or any of these characters. Judging by the length of the Moriarty Tribunal investigation, I believe it will take that long to get anything like answers. I think Brian Lucey is correct, the 2008 shock wasn’t severe enough to impress the need for change upon people. We will all witness a repeat of the same. BOH.

But that is not the point of irrelevance. A SRR will not change the parri-passu nature of depositors and senior debt. The point of irrelevance is in terms of systemic threat outcomes. Depositors are protected by the deposit insurance scheme which is backed by the state. Depositors will get their money back up to the deposit insurance limit regardless of what happens with the bank wind-up.

Given that, why is the current examinership process unusable for banks? Is it likely that a new process would or could raise depositors above senior debt? (it looks unlikely for the reasons @Eoin has pointed out).

That seems logical. I would have thought that subordinated debt is so called because the contract makes it so. Therefore, one assumes senor debt is not so.

Generally, I like to see the primary source material on any point. In this case it is the debt instruments which I am not privy to.

Given the importance of terms of the instruments, I suggest that it is in everybody’s interests that the form of such instruments be regulated (in form and in clearing/tracking/registration).

IMHO this applies across all instruments entered into by financial institutions. In particular, CDOs, CDSs and all other innovations should be regulated. This is an international issue as much as a national issue.

However, I suggest that what can be done on a national level should be done. We need to know not only what our bankers are issuing but also what they are buying. It is only because our bankers went property mad that they are not up to their oxters in CDOs. We need to know whether our systemic banks are dancing when the next game of musical chairs starts.

http://www.dcenr.gov.ie/Energy/Oil+Supply+Division/Review+of+the+Security+of++Access+to+Commercial+Oil+Supplies.htm

Good point. I didn’t know that about the petrol station. As I said before, I think people should be told what the immediate and long term consequences of (a) a banking collapse and (b) sovereign default would be. The suspicion amongst some is that the consequences would not be so bad. I think they would be very bad but I would like to hear from those in the know.

The conclusion reached in the report minister Eamon Ryan commissioned on security of oil supply was insightful I thought. The shock to the economy in Ireland would be of a permanent nature, even though, things in terms of commercial oil supply would return to normal. Many businesses would be left behind, never again to recover. My guess is that, given Ireland has no strategic oil reserves, it doesn’t have much in the way of finance either. As Taoiseach Cowen said, we don’t have that money lying around. I guess, the national pension reserve fund is about the only thing - requiring certain legal alterations etc to access it.

REVIEW OF THE SECURITY OF IRELAND’S ACCESS TO COMMERCIAL OIL SUPPLIES – FINAL REPORT, by Byrne O’Cleirigh Engineers and Purvin & Gertz Inc. Sept 2008.

on a far more basic principle, if senior debt ranked lower than deposits, you couldn’t actually call it senior debt could you? It’d technically be subordinated debt. The basic idea is that if something is called senior unsecured debt, nothing else that is unsecured (and depositors aren’t) can rank above it.

The general parri-passu rule is in s.275 of the companies act 1963:

275.—Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject to such application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

If depositors are not to rank parri-passu with other unsecured debtors then one must find an exception to this rule in statute law or in private contract law (i.e. in the contracts entered into by senior debt holders).

Good point. I didn’t know that about the petrol station. As I said before, I think people should be told what the immediate and long term consequences of (a) a banking collapse and (b) sovereign default would be. The suspicion amongst some is that the consequences would not be so bad. I think they would be very bad but I would like to hear from those in the know.

just to get this straight - you are claiming that senior debt does not rank pari passu with depositors in Ireland? I respectfully disagree.

To be honest, i think as Zhou has alluded to, we’re actually mixing up what we’re talking about. Pari passu is only relevant in terms of how the proceeds of the sale of a failed bank’s assets are distributed. The issue over depositors being made whole or partially whole by the State or via the use of an SRR later on are totally different items. The examples above that people have given about the US banks treating depositors differently etc are not examples of depositors ranking higher legally than bondholders. They do not disprove the issue of “pari passu” at all. What they are good examples of are of how the US government has found ways AROUND pari passu, to negate its impact (rather than negate its existence), and how it often makes the depositors whole AFTER liquidation/sale and SEPERATELY to liquidation/sale. When IndyMac and WaMu were liquidated or sold on, the key element to understand is that there were two seperate entities involved. The assets of each legal entity could only be disbursed to the creditors of that same legal entity, not to the other related but seperate legal entity. Hence all this talk about who ranked higher than who is actually irrelevant, as we are talking about seperate legal entities which had no claim over each other.

The problem in this country, obviously, is that we dont have a way to seperate the banks into good vs bad, into the entity we want to give the assets to vs the entity we want to take the losses. Hence our only other option is to guarantee depositors up to 100k seperately, a decision which has no direct implications for pari passu.

@ YM/Zhou

its irrelevant in practical terms, but the core concept is important in understanding just why we need an SRR in the first place. If it didn’t exist (PP), then we wouldn’t need an SRR from the perspective of looking after depositors (but we’d still need an SRR to keep banks operational).

The other issue that needs to be remembered is that an SRR is going to have to be compliant with EU law. They wont let us create a system which in the EU’s opinion allows the State to mistreat senior debt in favour of depositors. As such, the actual framework used is going to require some fairly nimble wording and possibly some changes to Irish company and contract law. Hence why i dont think it would be a bad idea for Karl or Phillip or Brian (or whatever academic wants to take this on) to consult with some legal experts on what needs to be done and what can be done to implement an SRR.

http://designcomment.blogspot.com/2009/08/tired-old-infrastructure.html

There is one slant to all of this, you, HS, Eoin and others have left out. Take this instance as an example. A colleague of mine was at a conference in Spain in 2008. He met a friend of his from Iceland at that conference. The thing is, the Icelandic person was stranded in Europe, without any money to spend. I think, she had intended to buy a ticket back to Iceland from the Europe end, when she intended to return home. But Icelandic currency became worthless while she was at the conference. (It was probably part of her annual leave or holiday if you know what I mean) It is like that movie Terminal, about Viktor Navorski (Tom Hanks), a man from the fictional country of Krakozhia. Anyone who has seen the movie will recall those tasty looking cracker/catchup/mayonaise delights he had to live on. Viktor basically got stuck in a ‘crack’ in the system. The movie always cracks me up. But it describes a very real situation for those who were stuck outside Iceland in 2008.

Iceland! Iceland!

(Is actually loosely translated from Krakozhia! Krakozhia!)

This obviously did not happen in Ireland, because we all had Euro currency in our pockets and drew the same from machines, and credit cards etc, wherever Irish people happened to be situated in the world in 2008. So we didn’t exactly become Viktor Navorski’s over night. The point I want to emphasize here is, try not to think in terms of currencies for a minute. Try to contemplate this fact for a second. The oil and petroleum product supply chain for Ireland is operated on the basis of lean supply chain philosophy. In other words, there is almost nothing in terms of reserves in our current (and creaking old) oil tankage around the country. Futhermore, there is all sorts of problems with import capacity through our out dated harbour infrastructure in Ireland. Dublin is the main centre of demand, but there are no strategy oil reserves in that area. In December 2008, it is a little known fact that many retail petrol pumps serving motorists in Ireland literally ran dry. A report commissioned by minister for Energy, Eamon Ryan, into Ireland’s strategy oil reserves estimates that Ireland requires a 90-day storage facility. The purpose of which is to get Ireland over the hump, in the case of a real emergency - which might even be a prolonged strike at Dublin port. The idea being, the Irish economy would be damaged by a sudden, severe shock arising out of lack of oil reserves. You only have to think about recent events of flooding damage and snow conditions in late 2009, early 2010, to get a real picture. BOH.

Thanks for reminding me of my own rule!

The State also had the legal freedom to deal with depositors differently as long as it dealt with all depositors the same. The only issue might have been if some of the senior debt holders could have said they were equivalent to depositors and entitles to be treated the same. The way around this would be to compensate each depositor/senior debt holder to maximum amount, e.g. €100K. However, Irish pension funds could not be treated differently to Sheiks for example.

If there had been a resolution scheme the position would be different as rankings could force a debt for quity swap for lower ranking debts without the bank seizing up. HS appears to be looking at resolution schemes in other jurisdictions notwithstanding that we do not have an equivalent mechanism here, as has been commented on many times on this site.

As such, HS is getting mixed up between bank resolution schemes in the USA and liquidation in Ireland. He may or may not also be getting mixed up between public statute law and private contract law. Either way, HS should be able to research the answers to his questions himself if he is not satisfied with the level of detail he has found here.

HS said that depositors and bondholders should not be separated by a mere ‘/’ in Eoin’s description of a liquidation. As such I don’t think it is unfair for Eoin to defend himself notwithstanding that others consider that the issue raised by Hugh Sheehy is something of an irrelevancy.

Beyond that, I think most posters are in agreement on the need for a resolution regime. The ranking of senior debt parri passu with deposits may not be wholly irrelevant though. Iceland has only underwritten deposit insurance to the tune of €20K per person. They have not been able to help Icelanders more than that as far as I am aware although I am open to correction. The Irish State may have been somwhat constrained in how it dealt with depositors/senior debt although I don’t profess to be able to give a definitive view on that point.

It is rather silly to decide on issues of fact by vote on a comment board. Regardless, you can tote me up in Hugh’s column so there is ONE response in his favour.

http://www.thepost.ie/breakingnews/world/eyojauidojsn/

Your Offaly Mein is confused …

im not getting into a slagging match here, its rather pointless i feel. Its clear i can’t convince you of a basic principle of Irish (and most other advanced economies) banking setup in regard to this. Please feel free to think that depositors rank higher than senior bonholders in the event of liquidation. If this is your view, then we don’t actually need a new resolution regime put in place to effect the orderly wind up of a failed bank, because why else would we need one? I’ll also note that the challenge i threw down, “does anyone else agree with Hugh”, has garnered precisely ZERO responses in your favour.

Well you have to hand it to him. Only the King of Offaly could get Blind Biddy a USA medical card.

Sometimes the power of my king leaves me in awe.

At other times I am just shocked.

What a generous King we have.

And one with such knowledge of money.

We are all safe under his reign.

Just had text from seven_of_nine - advising THE Offaly_Man in his hour of need - knew he looked somwhat chirpy today - she is back tomro after the vote, at which time Blind Biddy is flying out to get the implant on the green card ………

“We own eoin.”

No don’t get me excited.

Could we use him to blow hot air at windmills?

That ought to save us from the Green Horde who want to destroy my right to have a coal fired power station in Ireland.

Do the Chinese “own” the Green movement?

“Spose it’ll be just meself and Blind Biddy again for the Rugby - she is reading up on Lenin and Ayn_een Rand simultaneously so I’m prepared for the worst …”

Concern yourself not.

Seven of Nine was as disappointed with the rugby today as I am sure Blind Biddy was.

Seven of Nine sends her regards to Blind Biddy and is delighted that you finally persuaded the blind one to accept the Borg “Eye Socket Implant”. We hope she enjoyed the seeing rugby.

Now if only she that big clock in front of her.

Tick Tock Tick Tock.

How does one say that in Greek? Or Latvian. Or Spanish. Or Austrian.

It’s all just Californication to me.

Maybe the replicator can print me up some of them Zimbabwean Dollars or some of them juicy NAMA bonds.

Here’s an idea. The health service (apparently) doesn’t have enough money.

Simple. Print up some of them NHealthMA bonds.

Apparently it’s not National Debt.

S&P, Moody’s & Fitch will ignore it completely.

€20bn NHMA bonds out to sort the health service out.

I own the bank. We own the bank. We own eoin. The banks own us. We are all serfs of the banks, as is Eoin.

There is nothing ‘left’ - there is nothing ‘right’ - there is nothing ‘up’ - there is nothing ‘down’ - we must be in the ‘black_hole’ - is this ‘heaven’ - is this ‘hell’ - is this ‘the end’ - or is it ‘the beginning’ - did someone paint the blue pill red - why is seven_of_nine not answering the phone - tick tock tick tock tick tock tock tick tock tick tock tick WOW WOW WOW …… we are ‘back in time’ back in time …….. to zero.

“@Eoin.
Goodness me, an apparently endless supply of insult and bluster.”

Welcome to the Bond. Eoin Bond… fan club.

Consider yourself lucky that he hasn’t accused you of being insane, yet.

“But I don’t think that Bond Eoin Bond will impress me as a source.”

Funny thing that, I don’t trust him as a source either .Had to pull him up a number of times. A bit selective don’t you know.

Still, water off a duck’s back though.

He works for a bank.

“This inability to focus on TIME is doin me head in!”

Tick Tock Tick Tock Tick Tock.

That is rather the entire point of talk of regulation and “this will never happen again, because we say so” from the same people who gave you “this is not happening, the banks are solvent, because we say so”.

Any propaganda will do, the moral failure of bish hops, an indiscretion of an overpaid kicker of a pig’s bladder, two very odd children from Lucan having “lost” their record contract and having “found” a new one.

With all the news it’s difficult to know what day of the week it is never mind what time of day.

Heaven preserve us from actually knowing what time it is and how little is left before the State commits €100bn to a patently insolvent financial architecture.

Tick Tock.

It is of course not only little Ireland.

That’s what I mean by exogenous event.

Tick Tock.

Governor Daniel K. Tarullo

Toward an Effective Resolution Regime for Large Financial Institutions

At the Symposium on Building the Financial System of the 21st Century, Armonk, New York
March 18, 2010

http://www.federalreserve.gov/newsevents/speech/tarullo20100318a.pdf

“First, any new regime should be used only in those rare circumstances where a firm’s failure would have serious adverse effects on financial stability. That is, the presumption should be that generally applicable bankruptcy law applies to nonbank financial firms–even large, interconnected ones. One way to help ensure that the regime is invoked only when necessary to protect the public’s interest in systemic stability is to use a “multi-key” approach–that is, one that requires the approval of multiple agencies and a determination by each that the high standards governing the use of the special regime have been met. Second, once invoked, the government should have broad authority to wind down the company in an orderly way. This authority should include–among other things–selling assets, liabilities, or business units of the firm; transferring the systemically significant or viable operations of the firm to a new bridge entity that can continue these operations; and repudiating burdensome contracts of the firm, subject to appropriate conditions and compensation. Third, there should be a clear expectation that the shareholders and creditors of the failing firm will bear losses to the fullest extent consistent with preserving financial stability. Shareholders of the firm ultimately are responsible for the organization’s management (or, more likely, mismanagement) and are supposed to be in a first-loss position upon failure of the firm. Shareholders, therefore, should pay the price for the firm’s failure and should not benefit from a government-managed resolution process. To promote market discipline on the part of the creditors of large, interconnected firms, unsecured creditors of the firms must also bear losses. Here is where the potential conflict of policy goals is obvious. While losses imposed on creditors will increase market discipline in the longer term, the immediate effect could be to provoke a run on other firms with broadly similar positions or business strategies. Thus the extent of these losses and the manner in which they are applied may need to depend on the facts of the individual case. At the very least, however, subordinated debt, or other financial interests that can qualify as regulatory capital, should be fully exposed to losses. Fourth, the ultimate cost of any government assistance provided in the course of the resolution process to prevent severe disruptions to the financial system should be borne by the firm or the financial services industry, not by taxpayers.

The scope of financial institutions assessed for these purposes should be appropriately broad, reflecting that a wide range of financial institutions likely would benefit, directly or indirectly, from actions that avoid or mitigate threats to financial stability. However, because the largest and most interconnected firms likely would benefit the most, it seems appropriate that these firms should bear a proportionally larger share of any costs that cannot be recouped from the failing firm itself. To avoid pro-cyclical effects, such assessments should be collected over time. ”

Quite!