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.
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.
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.
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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.
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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.
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.
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.