Elderfield on Resolution

Thanks to Karl for the link to the transcript of Mr. Elderfield’s appearance before the Oireachtas Committee in the post below.  There is clearly a great deal that is of interest in the transcript, and it might be useful to develop some separate threads.  

One part of the transcript worth highlighting is Mr Elderfield’s responses to questions on the need for a resolution regime.  These responses came in exchanges with Deputies O’Donnell and Varadkar.   I have included the relevant extracts after the break. 

It is encouraging to see Mr. Elderfield engaging with the resolution regime question.   It is also hard to argue with his portrayal of the complexity of the issue, and with the legal challenges in particular.  While we must sympathise with how much he has had to deal with since taking the job, I am still struck by the lack of urgency he appears to give to the need for a resolution regime to limit the extent of the creditor bailout. 

Mr. Elderfield is understandably taking a forward-looking approach, and is concentrating on putting in place a regulatory regime that limits systemic risk, including consequent future liabilities to the exchequer.  This is indeed essential.   Maybe I am naive, but I think the risk of Irish banks engaging in reckless lending in the near term is low.   How we allocate the losses associated with the reckless lending of the past is still a live issue, however, and should be higher on the list of Mr. Elderfield’s priorities.   We should be focused on how we can draw on international best practice to have a regime ready for when the guarantee expires so that losses can be fairly shared with long-maturity investors. It is as if we are out in the workshop building a state-of-the-art new door, all the while the horses are still bolting.  

Deputy Kieran O’Donnell:      What percentage shareholding does Mr. Elderfield envisage the taxpayer taking in Bank of Ireland and AIB? He will agree that 70% of the recapitalisation figure has gone into Anglo Irish Bank which has not lent money in new loans since it was nationalised. What is his view of professional creditors or investors taking a share of the pain ahead of the taxpayer? There is a feeling this has not happened in the resolution of the Irish banking crisis to date.

Mr. Matthew Elderfield:  On the shareholding point, we will have to wait and see. Bank of Ireland has sent a strong signal that it is confident it will be able to secure private capital and keep the Government stake significantly under 50%. There is a strong prospect that it will be successful. AIB continues to work on its proposal and we are waiting to see what its capital plan contains.

Deputy Kieran O’Donnell:      Does Mr. Elderfield envisage that the State will have a majority stake in AIB?

Mr. Matthew Elderfield:  We will have to see how it pans out. Much will depend on the value it achieves for the asset disposals and what will happen in subsequent haircuts.

In regard to Anglo Irish Bank and cost sharing, it is important for someone in my position to be cautious in speaking too specifically about particular banks because of the legal proceedings that might be pursued. Answering in the abstract, we need to think about introducing resolution powers, with cost sharing mechanisms for failed banks, similar to the FDIC or the UK Banking Act 2009, in order that different levels of the capital structure feel varying degrees of pain the further away they are from retail investors. That issue should come before the Oireachtas for debate. Issues also arise in regard to insolvency law, creditor preference, property rights and the Constitution.

Deputy Kieran O’Donnell:      Should we put in a place a regime which involves sharing?

Mr. Matthew Elderfield:  That is right but a finely balanced argument can be made as regards how much pain should be shared and at what point in the capital structure. We need a regime which does this.

Deputy Kieran O’Donnell:      Does Mr. Elderfield regard Anglo Irish Bank as being of systemic importance at this point?

Mr. Matthew Elderfield:  It was certainly of systemic importance when the guarantee was introduced. The key issue now is less about systemic importance and more about the cheapest way to deal with it.

. . . .

Deputy Leo Varadkar:      . . . Mr. Elderfield referred to what may happen to Anglo Irish Bank in terms of a good bank-bad bank, the bad bank being an asset management agency. If we had a proper bank resolution regime in place now we could for example have a debt equity swap as part of that process and bond holders could take part ownership of the bad bank. All of this could be done prior to recapitalisation. In the absence of a proper resolution regime we are hamstrung by the guarantee. I am interested to hear Mr. Elderfield’s comments in that regard. Perhaps also he will explain why we do not have a bank resolution regime in place almost two years after the introduction of the guarantee.

. . .

Mr. Matthew Elderfield:  . . . On the questions on NAMA and good and bad banks and the resolution legislation, NAMA seems a reasonable approach. Different countries take different approaches. Germany has taken a good bank, bad bank approach and the US has developed the Tort programme. NAMA seems to be doing what it has been required to do and is identifying toxic loans. That the haircuts were much higher than expected, 47% average compared to the 30% estimate, shows there is a serious process going on that is identifying the real market value, even with the uplift. NAMA is taking the toxic loans off the balance sheets to clean up the banks and providing the banks with bonds they can use for funding. That is working reasonably well.

The resolution legislation is a difficult issue. Many countries have been found not to have resolution legislation. The UK had to rush through or very speedily adopt the Banking Act 2009 following the Northern Rock experience. That Act is a massive statute the size of a telephone directory.

Deputy Leo Varadkar:      It is something we could adapt. It might be quite appropriate.

Mr. Matthew Elderfield:  The question is whether one would do it exactly the same way. The UK is having what it terms “teething pains”. In Bermuda, we did not have any resolution legislation, but we were starting a big project for it. Many countries are discussing the issue. There have been discussions at EU level about setting a standard. The Federal Deposit Insurance Corporation, FDIC, has a great regime, but it involves pages and pages of complicated legislation. It is a difficult subject matter because it basically empowers one’s banking regulator to cherry-pick creditor rights in an insolvency. One must consider whether one should allow that. It is a sensitive subject and must be approached with great care. That there has been NAMA legislation to write, Central Bank legislation to write and bank recapitalisation to organise means resolution legislation has not been the priority, but it is on the list to be done.

Deputy Leo Varadkar:      The difficulty now is that in the absence of legislation, the Minister is arbitrarily creating a hierarchy which puts bond holders at the top and taxpayers at the bottom. That is not something we, as a legislature, ever agreed to do.

Mr. Matthew Elderfield:  The guarantee, which was scoped to some degree, was adopted by the Oireachtas. That provided support for certain sub-debt holders. I would like to be somewhat cautious about the Anglo situation because the lawyers will get agitated about comments made in that regard. The Deputy is making a fair point and Ireland needs a special resolution regime for the future that will give clarity.

Deputy Leo Varadkar:      We need it before the guarantee expires.

Mr. Matthew Elderfield:  I am not sure that is feasible. Even if it was set up before the guarantee expired, that could create some potential risks about bond holder claims. One would want to approach that very cautiously with the lawyers to see what can be introduced and when. I have not considered the matter in great detail.

27 replies on “Elderfield on Resolution”

“Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.”

Ayn Rand. 50 years ago. “Atlas shrugged” Still relevant?

You do not appear to me to be naive!

The banks have so little free capital that they risk their own salaries and pension every time that they offer a loan. So few loans are now being sought, that the gross loss of those who were skilled at gauging creditworthiness has no effect on such business.

Skills walk out of the door and anyone who would have baulked at the lending was sent on their way years ago, I fear.

The systemic importance of banks is now easily overestimated. They might all be in wind down? Would there be any negative effect? A good bank could be established now only by those who have no history in banking, as all those who have been involved are deeply cratered and offloading as many assets as possible.

Please, delight me and contradict me with some facts. But I fear again, that no one can …….

It may be expedient politically to ignore this for the moment,
Along with the unemployment and all that….

@John McHale:
“We should be focused on how we can draw on international best practice to have a regime ready for when the guarantee expires so that losses can be fairly shared with long-maturity investors.”

Perhaps the guarantee won’t expire. Yesterday’s SBP reported on an Brian Lenihan’s statements on the wireless on Saturday, including this:

‘‘The €100,000 deposit cover stands anyway – that is written into the Statue [sic] books. We believe the guarantee can be phased out – and it has to be – over a period. We can’t just switch it off, that would be like falling off a cliff,” he told RTE Radio’s Marian Finucane Show yesterday.

Mr Elderfield may be aware that there is uisce faoi thalamh.

Report here: http://www.sbpost.ie/news/ireland/lenihan-set-to-phase-out-


@ Pat Donnelly

I won’t contradict you but I will certainly agree with you. I have said several times on this site that what Ireland needs is to get some uncontaminated banks in here to trade. There is little stomach for that approach I wonder why?

Notice Elderfield says to Varadkar, “you make a fair point”. What was the point he was making? it was ….”the Minister is arbitrarily creating a hierarchy which puts bond holders at the top and taxpayers at the bottom.” At the bottom! Says it all really!

Plodding Gordon (George Foreman) Brown was able to re-capitalise HBOS and RBS over a weekend while our Brian (Mohammad Ali) Lenihan has stumbled from disaster to catastrophe.

Considering the money at stake, we should have hired all available people to adapt the UK Banking Act of 2009 which introduced special resolution regime and was used (if I remember correctly) to restructure Bradford and Bingley.

The decision to re-invent hot water by creating our own wonderful NAMA model precluded that option.

And of course we had to introduce blasphemy legislation.
Not surprising considering all of the above.

@ Robert Browne

Perhaps it is a view that it is best to be molested by your own that by other nationalities.
It seems to be a consistent view in this country?
Will we be moving bankers from branch to branch?

All ahead of us.

While I imagine that the Financial Regulator should have a role in devising a bank resolution regime for Ireland, I think it may be asking a bit much to hope that he will take the lead on it. He has to operate within a legislative and institutional framework, and the lead role looks to me to be more properly for the Government and the Department of Finance.

Mr. Elderfield’s comments about priorities and demands reinforces my initial view that one of the major stumbling blocks to putting a bank resolution scheme in force is a lack of capacity on the Department of Finance.

Whilst it appears this legislation is under active being consideration it would not appear to be imminent. It is difficult to asses what negative or positive impact the announcement of a resolution scheme might have. If it had the effect that depositors and senior creditors called in debts prior to the expiry of the guarantee thereby increasing our sovereign debt spread then we could pay a heavy price for doing the right thing.

When Mr Elderfield spoke of the “Tort” programme in the U.S. , was he indicating that he had advance notice of the SEC’s civil action against Goldman Sachs alleging various torts ?

Or did he intend to refer to TARP ? 🙂

Given the sums involved it seeems remarkable, perhaps even preposterous, that a lack of technically trained staff able to draft legislation, however complex, is the reason we don’t have a resolution scheme.

@ zhou

Chuck Norris doesn’t make mistakes.

He makes mistakes quiver with fear.


Bank Resolution down the agenda ………. the opposition might as well get drafting ……….. (why does everything take so long with this Gov?)

The Guarantee will be extended … ‘appropriate at this time’ will state the Minister ……….

Both opposite to what has been argued here for months ……. er .. years … er … could be decades ……… lazy-faire once again does for the Irish serfs …

Looks to me like Mr. Elderfield’s brief is very much in the present and building for a future ……. I wish him well.


Corporate Governance remains oxymoronic in Irish context ……….. 95% of all boards and senior execs responsible are still in position; 95 % of all politicos still in position, some even getting tax breaks for writing about it (cultural and artistic merit me ar*e); 95% of developers still in the game – swanning around; auditors, legal profession, other professions still in position and many to benefit from NAMA, having previously profited from causing its emergence; ignore the sideshows – we are still being thoroughly and ruthlessly screwed by these upper-echelon kleptocrats … 1789


And speaking of ‘legal power’ – why has the Office of the Director of Corporate Enforcement (ODCE) not been granted significant increases in its budget/personnel? Is this a latently strategic move by the Gov? … to slow down intentionally what we hope will eventually emerge …. Money, Power, Law …..[comfortably entrenched]……… and the Lifeworld of the serfs [bleeding profusely] in the half-penny place as is usual in these affairs.


Irish Nationwide Building Society today announced losses of almost €2.5bn for last year.
Irish Nationwide has been guaranteed €2.7bn of taxpayers’ money in a recapitalisation plan. Chief executive Gerry McGinn said lessons of the past were being learnt. “We have conducted a detailed analysis of the assets of the society and have created a fundamental change in the way the Irish Nationwide Building Society is managed, ensuring that robust corporate governance is in place and is effective.”


Methinks Bank Resolution and prompt burial rites an appropriate form of Two Fingers Corporate Governance for this little monster. Still, a fairly well-connected little loan-book appears to have been censored somewhere along the line ……. be neat to do a little upper-echelon network analysis on the data – hey, we own it – how about access to the data for a little exploratory research? This is … er … supposed to be the ‘smart economy’ innit?

Brian Lenihan likes to quote Mr Schauble. Berlin has scant room for manoeuvre over the bail-out given a likely court challenge by German professors but Schauble promised to “abide by the constitution”. Reasonable of him.

Our professionals plying legal trades never let our constitution get in the way of them making ‘a few pounds’. I am thinking specifically of NAMA, and I am thinking that all those bits of paper mortgages, securities, first charge, second charge and no charge etc floating around were all drawn up by our legal experts who were well paid for their work. Who are to be well paid again and again as NAMA unfolds. So things are going according to someone’s plan.

It can be noted that Germanys dilemma has caused spreads on 10-year Greek bonds to surge to 454 basis points over German Bunds. The highest since the launch of the euro. The market have figured out that Greece is still broke and will need the same amount again every single year for the next five or six years.

Mr. Elderfield is playing down his fears, Mr. Lenihan’s fears, the DoF fears, that individual mortgage holders will demand a NAMA or a NAMA “BEAG”.

However, it is becoming more likely that those investors will jump ship as they realise that Lenihan’s/Elderfield’s policy is to slowly roast them. Consequently, they may go straight for the jugular laying the blame, for the credit boom, where it belongs, at the DoF’s, and regulators door. Bankers don’t do contrition they get away with what they are allowed to. BoI loan book in 2004 was 100bn four years later it was 200bn. Peter Matthews an independent banking expert says that a prudential rate of expansion would be around 5% per annum. Now if he knew that, why did others not understand it? Why did they do nothing to stop the boom becoming “boomier”? Why was the consumer not protected?

There is a good chance that these investors will win their case according to legal experts in Trinity. Not only did they not monitor what was going on, they encouraged the madness and poured petrol on the flames, giving full-on approval for it. Eventually it will come down to the thin line between criminal expansion and suicidal lending practices, gross incompetence from public servants. So are these investors victims of light touch regulation, incompetence or their own greed? All three? If so how must the blame be shared financially between the parties?


Bit off-thread …….. IMF on banks and some comparative ……

IMF Policy Paper: Cross-Cutting Themes in Economies with Large Banking Systems

Summary: This paper examines cross-country perspectives on economies with large banking systems relative to GDP. As such economies tend to have domestic institutions with major foreign currency cross-border activities, strong links are generated between the health of the financial system and sovereign sustainability. These links are of central interest to the paper. It does not cover off-shore centers as their international links tend to be relatively unrelated to domestic activities.

To make the analysis more concrete, the experience of five economies-Hong Kong SAR, Iceland, Ireland, Singapore, and Switzerland-are featured (plus a Box on the Benelux region). These economies had large and relatively diversified international banking sectors compared to their fiscal capacity before the global financial crisis of 2007-09, and divergent experiences over the crisis. The paper analyzes the reasons for these outcomes. (A range of private and public sector individuals were interviewed during missions to Belgium, Hong Kong SAR, Ireland, Singapore, Switzerland, and the United Kingdom.)


@David O’Donnell – “some even getting tax breaks for writing about it (cultural and artistic merit me ar*e); ”

Surely it was eventually classed as a work of fiction, therefore qualifying for the tax exemption?

Banking resolution regime legislation was arguably far more important than NAMA and would have done just as much to clean up the banks.

That we still haven’t started the process is very worrying.

@ Robert Browne

‘Eventually it will come down to the thin line between criminal expansion and suicidal lending practices, gross incompetence from public servants. So are these investors victims of light touch regulation, incompetence or their own greed? All three? If so how must the blame be shared financially between the parties?’

Could there be even the slightest possibility that some (suitably indirect) inducements were offered to join in the dance, or at least to look the other way ? Not a brown bag, mind you, but some sort of fashion item.

The public debate remains abstract, as much of the pertinent facts are kept from view while painstaking and detailed Garda enquiries are carried out. That gives insiders vital time to detach themselves financially, emotionally and symbolically from the debacle, while new ‘clean’ clothes are being prepared for the emperor.

Then it’s back to business as usual. They hope.


Management of ‘time’ is central to this admin’s policy – punt everything into the ‘fulness of time’ in its own short-term interests.

@ paul quigley

Watching Prime Time the other night, two professions were present but their clothes were tattered and threadbare. The accountancy profession and the legal profession.

They were spoofing away to a shocking extent and digging the hole they were in bigger, deeper and wider. The public were looking on in disbelief with distain if not anger all over their faces.

On Mr. Elderfield I think he has already been taken prisoner by Mr. Lenihan and his cohorts. What had he to say on the NAMA SPV or more specifically the National Asset Management Agency Investment Ltd, which is the SPV which holds the controlling 51% of NAMA.

The investors who put up 17 million each were, Irish Life Assurance, New Ireland (owned by AIB) and pensions and institutional clients of AIB. It looks pretty obvious that the people who have stumped up the “private” capital are the very ones who NAMA will be doing its business with. There is a huge conflict of interest here and I would like Elderfield to rule on it. I am not happy with explanations that so and so will walk out of the room when their loans are being discussed, this is the kind of nonsense that got us into this mess.

@ Robert

It’s important to be realistic about what we can expect from any regulator. The office can be effective only to the extent that it is allowed to be, and it’s no surprise that the first thing the new incumbent wants is staff.

No matter how well resourced the office is, certain institutional barriers stand in the way of reform. Some of these will require new legislation and new structures, and I have no doubt that these will be forced upon our government. The ECB is bound to insist on a thoroughly modernised regulatory environment for the IFSC and the FDI sector. Too much of other people’s money is at stake to have it otherwise.

The more serious insitutional obstacles seem to me to lie in the domestic economy, including the public sector. As I see it, these obstacles are as much cultural as economic or political. In very plain terms, we seem to have a naïve faith in the moral probity and technical ability of folk who have been to the right schools, have nice accents, or live in nice suburbs. The winners enclosure.

This is a small island, and the insider/outsider divide seems much more important than formal left/right disputes. If the bust proves anything, it is that we have to pay more attention to ourselves. Where we are going as a society, and how we are to organise ourselves for the long haul ? Our infatuation with all things American was great fun, and was healthy for an ex-colony, but it has led us to acquire many of their problems. Time to move on.

Professional service providers cannot prosper without a functioning economy, as many recent graduates are discovering. Like any other sort of unemployment, that is a tragedy and waste, but we have silence from the relevant professional bodies.

Churning out graduates to what ? Would things be in this state if there had been more focus on productivity and less on earnings, or more emphasis on service and less interest in getting slice of the action ?

@ Paul

I fear for our youth.

I agree totally with your views of our professional classes. I think that, as a society soon we are going to realise the hard way, that we cannot afford the self deception and kowtowing to these professionals any longer, because they are leading the country deeper and deeper into bankruptcy. The strategy from their point of view, was a good one, lets ring fence all the banks, building societies etc etc and bail the whole bloody lot out with billions and billions. There was only one flaw and that was they forgot that you need an economy and compliant tax payers to pay for such a bailout and to service the sovereign debt. Mark my words, if Eurostat keep up with this dodgy off-balance-sheet chicanery (accounting) it will lead to the collapse of the Euro within say three years.

Martin Wolf, had a piece in today’s, FT ( wednesday 21st) under the heading, “The challenge of halting the financial doomsday machine” Wolf asks, “can we afford our financial system?” and says the answer is a definite “No”.

By allowing banks to outgrow the economy the tax payer has been put on the hook by the FF/Green government who seem to view all banks as being of “systemic” importance, while strangely putting the real economy on a funeral pyre and torching it. The real economy has become the shadow economy while the banks have become the “real” economy. A reversal of this philosophy is needed immediately for obvious reasons.

Worst of all, is the risk that the government will try to create another property bubble so they can justify NAMA, and not look so stupid for incinerating so much of tax payers money. This is the government plan and I would be afraid to say on this site just how far FF or FG/Labour will go to re-ignite that bubble. Suffice to say, that NAMA is worst than the partitioning of the country and in many ways is the re-partitioning of the country.


Agreed. Wolf has named it. The financial services sector has much to offer, but in its current unstable form, it is a cancerous growth on the body economic. The recent Global Financial Stability Report points to the upcoming crunch as private sector credit is crowded out by distressed sovereigns.

I am not saying that our professional elite are uniquely responsible for our local mess. It’s just that their rent-seeking activities are ultimately incompatible with our economic development and the employment prospects of our younger folk. Both our public and private sector institutions are full of gatekeepers, who spend their days fortifying their personal and family fiefdoms, and strengthening the elite networks which lead the decision making process.

The tribunal process shows the way in which those networks act to neutralise any attempt at reform, by raising the investigation cost to unsustainable levels. The main mechanism for that is the ‘normal’ ( hidebound and hierarchical) functioning of the legal profession itself, in that formal adversarial procedures tend to obscure a confluence of personal and corporate interests. Big problems are the domain of big players, and round we go lads.

As you say, our banks were allowed to outgrow our economy, and to play big league spread betting. There was a relatively small group who planned the boom and profited massively from it, and a very much larger group which simply pocketed the windfall while letting the lunatics run the asylum.

Their instinct is to keep the head down and wait for this to blow over, but Ireland has changed. The new regulator can only do so much. There can be no healing of the body politic without many more resignations and disclosure on the part of parties, professional institutions and senior civil servants.

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