Credit Institutions (Stabilisation) Bill 2010

The government have published the Credit Institutions (Stabilisation) Bill which is scheduled to be debated on Wednesday and enacted by the end of the week. It appears to be a sort of mini-special resolution regime bill. The Minister for Finance’s statement on the bill notes that “it is the first important step in putting in place an extensive Special Resolution Regime (SRR) that will provide for a comprehensive framework to facilitate the orderly management and resolution of distressed credit institutions.”

The explanatory memo for the bill is here while the bill itself is here.

For our legion of subbie-watchers, the relevant sections are sections 28 to 32. They appear to empower the Minister for Finance to make debt-for-equity swaps to subdebt holders and to have various rights of these debtholders to be set aside if the state has provided financial support required to allow continued viability of a bank. As speculated here recently, the bill appears to allow the Minister for factor in past equity investments when considering whether to introduce a “proposed subordinated liabilities order” which would allow such powers to be introduced.

For me, this raises two questions: First, what is there in this bill that couldn’t have been introduced two years ago? Second, if the bill gives the Minister the powers to make certain rights of subdebt holders cease to be exercisable, then is there a legal impediment to the Minister having the power to deal with other creditors of a bank.

90 replies on “Credit Institutions (Stabilisation) Bill 2010”

It certainly introduces sweeping powers over the banks.

I would like to think about it a little bit, but my initial reaction is positive. Assuming these new powers are used to restructure the banks to make them viable entities again, then this seems an entirely necessary development and importantly, involves the banks themselves in accepting the pain and subjection that should rightly accompany their failures as independent entities.

By guaranteeing the banks we left the State liable for their mistakes, yet we have failed to assert any control over them in return for that liability. This Bill appears to rectify this situation.

So, while I am going to reflect on it a bit, I initially welcome the new Bill.

A couple of things.

The bill implies that some of its powers could be applied to individuals as well as financial institutions — the Minister can designate them as “relevant”. Not clear whether they have a Sean Quinn situation in mind.

It seems hard to answer your 2nd question without knowing what they have in mind for the SRR.

From the bill:

“without prejudice to paragraph (b), the extent to which
the State has, in particular, provided financial support by
way of equity investment (or equivalent) in that

“the likely extent to which the subordinated creditors would
be repaid amounts owing to them in a winding up of that
institution in the absence of such financial support;”

“the effectiveness or likely effectiveness of liability management
exercises undertaken by that institution in respect
of its subordinated liabilities.”

“there is an imminent threat to the stability of the financial
system in the State and the Minister is of the opinion that
compliance with subsection (5) would result in significant
damage to the stability of that financial system”

Ahem, not wanting to be an “I told you so”…. 😛

(and comment 103431 a little bit further down)

“Reckon its a simple case of structuring the law so that it kinda ignores the state injections of capital for explicitly “financial stability reasons”. I believe i said this a few months ago…”

“On BOI and IPBS, imo, the resolution laws will not be used to enforce losses, but simply as the big stick to get them to agree to it voluntarily.” – note the provision dealing with the effectiveness of liability management excercises, ie you dont agree, we bring in Plan B

I actually believe Lenny may have cogged my suggestions from on here… 😀

@ Eoin

Yep, fair enough, kudos earned. To be honest though, I also thought this was the way it would work. I just said that this approach seemed to me to be “legally dubious” and a few others who know a bit more about the law than me agreed. But I guess the government’s lawyers reckon this is ok and that’s good news.

Still, you’d hardly be surprised to see this stuff ending up in court e.g. why are AIB giving us poor subbies the shaft when they currently have tier 1 equity ratio of 10.5%?

Where does this leave the “wealth management” dept at BOI – or, more to the point, the clients?

Financial regulation anyone?

@ Karl

where do i collect my prize(s)?

But seriously: “Still, you’d hardly be surprised to see this stuff ending up in court”.

True, hence i still think that voluntary exchanges will actually end up being the way that losses are in reality enforced, but haircuts will be immeasurably larger thanks to the legislative “stick” now officially in the background. The terminology in the legislation is vague enough and the legalities grey enough as to provide enough uncertainty that subbies may decide to take what relative morsels are offered on the table in each situation.

BOI and IPBS subbies will be strongly encouraged to take up whatever is offering/currently being offered to them on debt exchanges, while AIB subbies will be deathly afraid of that institution’s liability mgt exercise being deemed “not effective enough” by either this or the next government and so risking the ‘legislative trigger’ being pulled. As such, they’ll be near forced to take whatever is on the table.

I don’t understand how this bill will allow as the Minister states in the accompanying press release ; “for the injection of capital into AIB before the end of the year to make sure that the bank is compliant with the Central Bank’s regulatory capital requirements.”

How will it allow for the injection of capital into AIB who have been given until the 28th of February to raise that capital independently and without state aid? They have also been given until the 28th of February to meet the new capital core ratio requirements.

Does this mean the state are going to inject from the NPRF to AIB the 9 billion before the end of the year? What about the €10 billion, of which €2 billion is to be used as insurance on some of the loan books, which Honohan stated in that ill fated News at One interview would be injected immediately and would go in as an investment.

How much of the remaining €8 billion is going into either financial institution and how does this effect meeting the “regulatory capital requirements” when Honohan stated that the extra €5.3 billion for AIB and extra €2.2 billion for BOI was separate to the €10 billion injection.

What is going into AIB before the end of year? How much is going into AIB and where is this injection coming from? Why does this bill facilitate such an injection ? What is it in this bill which facilitates AIB in raising their capital before Feb 28th that does not exist currently prior to its enactment?

Another outstanding question is how can the government right off subbies without writing off shareholders? If AIB is nationalised through legislation, that could solve the legal problems but if state remains 96% shareholders from having to pump in the entire €9.7 billion that it has to raise by the 28th February, then legally how they are going to write of subbies? My understanding is it can’t be done. So is it just a red herring stick to beat confused bondholders with?

This comment is a little off topic but I believe the bill giving effect to Soverign Annuities for pension funds will be published tomorrow and there has been very little commentary anywhere to date about the huge, irreversible change to pensions policy (if there is such a thing) that this entails.

The result of this proposal is a huge reduction in security (and hence value of) the pension rights current pensioners have in Defined Benefit pension schemes. These people will have no time or means to make up any future shortfall which might/will occur when if the government defaults (on coupon only bonds) when their pensions will reduce to zero.

The current situation is as follows:

Pensioners have first call on the assets of a DB scheme if it is wound up (for example the Company defaults on its future obligations). Their pension would be secured with an insurance company which makes it risk free (or as close as it can be to that). Therefore, it is extremely unlikely that pensioners would see a reduction in their pension level under any foreseeable circumstance.

It is now proposed that pension scheme trustees could remove the pensioners from the pension scheme and give them an insurance contract which is backed by a eurozone bond issued by ANY eurozone country (greece, ireland etc). Given the extemely limited powers available to Trustees, this decision will inevitable be driven by Companies who will (rightly) challenge the Trustee as to what is wrong with a Scheme with Society of Actuaries, Irish Association of Pension Funds and government backing.

In a further twist, the (already low) Minimum Funding Standard for DB schemes (one of the few levers Trustees have for forcing Companies to pay contributions) is being lowered to the extent that Schemes invest in riskier assets. As a simple example if a Scheme has 50m in pensiner liabilities and 50m in non pensioner liabities, investing 50m in greek gov bonds will reduce thier liabilities to less than 75m (pensioner liabilities will be discounted at 14% instead of 3%).

So the riskier the investment portfolio, the lower the capital requirements. If only we could make similar rules for the banks, they mightnt need any more capital.

This is a disastrous idea (from a government desperate for cash) which could decimate the small life savings of many pensioners (to the extent this has not already happened).

Somebody with influence and media access needs to highlight this (and expose cosy consensus between gov, pensions board, society of actuaries, Irish Association of Pension Funds and Socal Partners) before it is too late.

(i) Pensioners have the protection of first of all a Company

The entitlement of the Minister to make a “subordinated liabilities order” is predicated on a similar statutory assumption (legal fiction) as was employed in the nationalisation of Anglo in 2009. Compensation for Anglo shareholders is to be assessed under the 2009 Act on the assumption

that no financial assistance, investment or guarantee (other than the guarantee already provided under the Credit Institutions (Financial Support) Act 2008 ) would in future be provided to or made in Anglo Irish Bank, directly or indirectly, by the State

The legitimacy of similar assumptions in the context of Northern Rock was upheld by the Court of Appeal.

But the underlying purpose of assistance by way of LOLR, and the nationalisation of the company, was categorically not to confer a benefit on the shareholders of Northern Rock . The service which those measures provided was a service to the national economy, and nothing else. The “rescue” of Northern Rock ‘s shares was not of itself the purpose of the exercise, which was to prevent damage or further damage to the banking system as a whole. To confer any benefit attributable to the rescue upon the shareholders would as I have indicated have been inconsistent with the very nature and purpose of the LOLR scheme

The principle underlying the three pieces of legislation is the same: the interests of the affected shareholders and subordinated bondholders are treated as if the relevant institution had not been rescued. The reality that the Government did, in fact, intervene is to be disregarded for legal purposes, seemingly on the basis that the rescue was never intended to benefit the shareholders or bondholders, but rather was done in the wider public interest. (A similar sentiment seems to underlie last night’s decision to withhold the guarantees at Anglo.)

A cynical observer might argue that the fact that the Government included subordinated bondholders in the original blanket guarantee makes it difficult to argue that its interventions in the banking system were not intended to benefit subordinated bondholders.

To be fair to Eoin, the real genius in his earlier contributions was to point out the difficulty of using similar assumptions or legal fictions to impose losses on senior bondholders. It is one thing to say that the financial position of a bank is so precarious that it is obvious the subordinated bondholders would have recovered nothing in a winding up; as Eoin correctly argues, it is much more difficult to identify what level of losses senior debt would have suffered in a hypothetical winding up.

I also share Karl’s concern that the sequence of (i) putting further capital into the banks; and (ii) subsequently seeking to impose losses on sub bondholders, is incorrect.

@ Bond. Eoin Bond…

I actually believe Lenny may have cogged my suggestions from on here…

Lenny owes you about €4m in consultancy so. Happy Christmas 😈

@Karl Whelan
“For me, this raises two questions”
A mere two? Let’s be honest. The public have never been told anything near 50% of the truth, at any time. Not alone do we not have the answers, the truth is we don’t even have the questions. It’s been Opus MOF/DOF the whole way along. The establishment have concealed a huge amount of material facts about this crisis from the public. Not only that, their spin machines have actively and prolifically mislead us. Only a tiny proportion of the establishment iceberg is ever in public view. Now that we are voting to tie our own hands for the next four years the huge question is this: what aren’t they telling us?

“First, what is there in this bill that couldn’t have been introduced two years ago? Second, if the bill gives the Minister the powers to make certain rights of subdebt holders cease to be exercisable, then is there a legal impediment to the Minister having the power to deal with other creditors of a bank.”

Well done for still asking the questions. So in the spirit of my above comment I’ll reply with two more. Did the Irish side push for losses on subordinates or was it the Europeans? Coming up to the funding crunch in Sept were we considering an end to the guarantee but the deposit run ruined the plan, or was it just another accidental (?) bungle?

@John Kennedy
“So is it just a red herring stick to beat confused bondholders with?”
That would make a great headline.

@ Hoggie

yes, fair enough, wasn’t ALL my idea. 😛

There’s plenty of shared-glory for us all to bask in…

@ Rory O’Farrell

will that be covered by the bonus-busting provisions in the legislation? Lenny could certainly argue an ‘inability to pay’…

@ Karl

I’ll answer your 2 Qs.

Why not enact this 2 years ago? Would we be any better off? Would we have saved any money? How many subbies matured in the last 2 years?

If we can do this to subbies why can’t we do this to seniors? We now know the government can do whatever they want. They could confiscate all assets of people living in D4. The reason they can’t burn seniors is now patently clear, the EU won’t let it, and we need the EU so very very much.

@Brian Woods II
“Why not enact this 2 years ago? Would we be any better off? Would we have saved any money? How many subbies matured in the last 2 years?”

If this allows us to impose heavier losses on subbies, and it definitely will IMO, then the previous buy backs could have been done at significantly lower prices.

On the bonuses thing, make no mistake they will get their bonuses, that is the law. Lenny has postponed this reality until the new government is in charge. Gilmore spotted the trap, that’s why he stated in the Dail that the bonuses will be paid.

Surely we would only have to be €0.01 below the legal capital requirement to validate burning subbies?

As in if the Gov gave BOI 2.19999999bn etc.

Or a different figure since we I don’t think our 12% is necessary a legal requirement just yet but you get the thought.

@ D_E

How much is at stake? Comrade Gurdiev says we owe 600Bn. How much of that would we have saved if this legi was enacted 2 years ago?

Burning the subbies is all very well but with Moodys viewing the forced exchanges as a default or a quasi default is it not likely that all the institutions availing of the proposed legislation to make a Soprano offer to subordinated bondholders will inevitably result in their other bonds being contaminated through lower ratings.
Perhaps Eoin has a view on this.

What’s interesting is that the door is left open in the legislation for later amendments to apply the same treatment to depositors/senior bond holders. (Presumably depositors would be made whole). So if, in 2013, the banks (or whatever resolution vehicle the senior bondholders end up in) are still desperately insolvent and the EU says “suppose so”…

Many, including your good self to the foremost, have said that buying back undated subordinate bonds when the coupons weren’t being paid was a total waste of money. If I was minded to be a conspiracy theorist, I’d say it was a corrupt waste of money, but that would depend on who the subordinate bondholders were… what sort of gambler would just look at the 8% yields and not think of the risk?

“is it not likely that all the institutions availing of the proposed legislation to make a Soprano offer to subordinated bondholders will inevitably result in their other bonds being contaminated through lower ratings.”
Yes! And this is wonderful news as they will be offloaded by their owners at firesale prices. And buying back senior bonds in the secondary market at low prices makes sense (since they are both dated and coupon paying).

@Karl Whelan

To the first question: No, and a much meat-ier resolution could have been launched to include all that senior_lionmeat in Anglo_Irish and INBS ….. and simulaneously keep EU informed one second after pragmatic action … if only … To the second question: no, imho, I see no legal impediment to action by ‘the state’ – the impediment is essentially political & geopolitical with an ideological twist (and this FFGP lot sure ain’t up to it …)

@ Eoin ‘The Vanguard’ Bond

Would be a rare instance of a gem from the public sphere gaining access to, acceptance within, and implemented by a Vichy-Bank Regime to the eventual benefit of a few serfs.

Blind Biddsy say Hi! Now if he could only come up with a way of shaving his seniors, then we might order that goose for Xmas.

I was thinking more of the institutions trying to raise funding through senior bond issuance in the future. Subordinated debt is as dead as the dodo but senior bank debt will obviously have maturities which need to be refinanced. The markets are unlikely to have such a short memory as to buy new senior debt in BOI when they need to issue more to pay down expiring issues having gotten burned with their subs.

“First, what is there in this bill that couldn’t have been introduced two years ago? Second, if the bill gives the Minister the powers to make certain rights of subdebt holders cease to be exercisable, then is there a legal impediment to the Minister having the power to deal with other creditors of a bank.”

Ideology almost certainly drove the determination to retain the usual capital structure and a quote. Idiotic imho.

I think the second question is quite open. You would need first of all to decide what to do wrt deposits. Any hint they would not be provided with an alternative new bank and fully guaranteed from state funds, and you would have a disorderly run.

O’Cuiv came up with a figure a few days ago of 82bn for the 100,000 guarantee. I was surprised there was so little comment on this.

“How much is at stake? Comrade Gurdiev says we owe 600Bn. How much of that would we have saved if this legi was enacted 2 years ago?”

No idea why the €600bn is relevant to the discussion.
Won’t know for definite until we see how how much of discount we can force with the new legislation. Rough estimate I reckon we could have saved an additional €3bn to €4bn.

People seem to have got used to talking in billions without appreciating the amounts they are taking about.
€3bn would still have given us something as large as Metro North (not a fan but some other capital project of equal value could have been built)

I put most of the mistake in the government’s banking policy down to incompetence rather than corruption.

Seanie did have €5m in Anglo subs
And did hear a whisper that Quinn may have built up more than an equity stake in Anglo.

Mr. McManus also refused to comment on burning bank bondholders on the basis he might be one of them on Ivan Yates on Monday


Apart from our native banks being unable to raise capital in the bond markets in future it remains to be seen if the proposed legislation suffers from the effects of the doctrine of unintended consequences.

@Dreaded Estate
Even if most of it is down to incompetence that still means that much of it is down to corruption.

They’re mocking us! From
“I see over on they are still discussing the subordinate debt angle. That subject is so six months ago. What struck me about the Bill was that it brought one step closer the crystallization of the bank losses. That financial armageddon that they have been trying so hard to avoid for the last two years…
For me the big mystery is why the Basel II waiver and trading through option was never pursued. Why all these bound to fail efforts at deferring the crystallization moment when there was a perfectly good alternate mechanism available backed by decades of experience?”

Also comment there about war time level of powers for minister in bill.


I would also ask the question. If the MOF is engaging in legal fiction to burn liability holders below you in the capital structure, what comfort do you have that it stops below you. I think one of the unintended consequences of this that you should not participate on the liability side of any Irish bank now

Moreover, since he seeks to disregard the the rules retrospectively on the law of contract as regards bankers bonuses, Section 23 and god knows what else, why would you have anything else to do with investing in this country.

I wonder does this country still meet the definition of a market economy.


Same thoughts here. When this lot is eventually challenged legally my belief is that an unholy mess will ensue. And expect the challenges in a forum other than the four goldmines.

I note that credit unions have been included in the act. Transfer orders may include transfer of assets and liabilities to entities other than credit unions. Wonder why the explanatory note misses this issue as its bound to cause mayhem amongst credit unionists

Given the speed with which this was produced after the commitment to produce it was made (Nov 28th) it is likely that it is based at least in part on the work that the EU Commission was already doing on bank resolution, but mapped into national legislation. Some material on this can be found here .

For example

The resolution powers are the various legal powers that, in different combinations, authorities exercise when applying the resolution tools. These include the core powers to transfer shares in, or assets, rights or liabilities of, a failing bank to another entity such as another financial institution or a bridge bank; powers to write off or cancel shares, or write down or convert debt of a failing bank; power to replace senior management and power to impose a temporary moratorium on the payment of claims. Supplementary powers may also be needed, including a power to require continuity of essential services from other parts of the group.

The application of these tools and powers may interfere with the rights of shareholders and, in most cases, creditors. Accordingly, the framework would include safeguards and mechanisms for compensation where necessary. The guiding principle for compensation that the Commission is considering is that affected stakeholders should suffer no greater loss than they would have suffered if the institution had been wound up under the applicable insolvency regime.

So the principle that the creditor losses would be calculated based on an ‘imaginary’ insolvency that would have occurred in the absence of taxpayer support is likely to be EU-wide. I do not think this should be difficult to enforce legally in the case of Irish banks. The Commission are also trying to allow for early intervention which would be more difficult, since the ‘imaginary’ liquidation would involve predicting future events (in the absence of taxpayer support). In case of the Irish banks there is no need to predict future events – the facts speak for themselves. The intervention/resolution is not early, but very late.

Getting bank resolution right is not easy. There is a difficult trade-off between facilitating fair loss sharing and protecting – and indeed been seen to care about protecting — the rule of law. The challenges are especially acute when the rules of the game are changed retrospectively.

Although the legislation announced yesterday is only preliminary step to a complete special resolution regime for banks, I worry that it comes with significant reputational externalities. As observed with the UK SRR legislation, best practice involves careful consideration of triggers for non-bankruptcy based resolution powers and attention to creditor rights. In wiping out the claims of subordinated debt holders, the legislation gives quite arbitrary powers to the government, and in particular the power to retrospectively disregard the loss absorbing role of State capital.

Of course, the new legislation follows closely on the AIB bonus saga. While there appears to be almost universal support for the move to rescind the bonuses, it essentially involves the government threatening to withhold support if the bank honours certain employment contracts. One does not need to have any sympathy with the individuals in question to see that this also have wider implications for the perception of State respect for the rule of law.

Since the crisis struck, there have been legitimate complaints from civic society about underlying institutional weaknesses in Ireland. But the most important determinant of institutional strength is a country’s underlying “civic capital”. In a country with stronger civic capital, I doubt it would have been so hard to convince popular opinion of the negative consequences of such an ultimatum.

@John McHale

This piece puts the AIB bonuses in perspective – the traditional perspective of goodies for the boys and girls.

Benchmarking: one ATM that seems destined not to run dry. Are any other public servants getting bungs?

@ John Mc

Lenny yesterday: “Given the exceptional nature of the powers contained in the Bill, the powers are time-limited and scheduled to expire on 31 December 2012.”

We need to think of these as emergency powers being brought in during an “emergency”. Given the truely massive protection afforded to bondholders over the last two years, this still seems like an exceedingly good deal for them in the overall context.

@John McHale

I am amazed at how often “reputational” damage, whether due to possible IMF/external involvement or possible debt restructuring has been positioned as a more important principle than the rights of citizens and taxpayers. Reputation as viewed by who exactly? And as the reputation of Irish banks is already pretty low does it matter? And in comparison to the rights of the citizens that the government represents does it matter?

It is standard corporate practice for someone putting in money that saves a company to have complete control. It happens all the time in high-tech startups – after a washout round of venture capital financing existing shareholders may be wiped out, founders fired, salaries changed, bonuses cancelled etc. Whoever pays the piper calls the tune. That’s the way capitalism works. It is no different in this case – without the rescue money the bank would be insolvent. Putting in rescue money gives you control, since without it there is just a liquidation. So not only is the principle sound and in widespread use, but it appears also to be a guiding principle of the EU Commission’s own bank resolution proposals.

And as for AIB bankers not being paid bonuses for driving the company into insolvency and costing unrelated parties billions of Euros, well I think they’ll get over that. As Fintan O’Toole pointed out there seem highly dubious circumstances about the “contracts” involved, which may even warrant a legal investigation. Again it is not unusual for executives to try and arrange last minute bonuses, stock options, create poison pills etc. in the face of an impending, perhaps hostile, takeover or change of control. In AIB’s case it appears very likely that there were misrepresentations made about the state of the bank to the government, and in the corporate world that would be grounds for terminating or nullifying contracts made as a result. Furthermore since this is a rescue, and not just a normal takeover, then the previous rule about he who pays the piper calling the tune applies.

The greed and sense of entitlement for

Normally I would agree with you on the difficulty of getting SRR right. In part, I think this is down to a feeling that it is being unfair on banks which might trade out of difficulty (as the UK banks did following the property crash in the 1990s).

I don’t this particularly applies in Ireland given the obvious bustness of the banks. Indeed, if Mr. Lenihan had suggested that the former CEOs be tarred and feathered and run out of town I don’t think there would have been too many eyebrows raised.

Last line in previous post can be ignored. If the government is viewed as a ‘white knight’ (or maybe even a ‘black knight’ if you are a disgruntled AIB employee), rather than as a government in this case, then I think its actions are little different to what happens all the time in corporate rescues or takeovers.

@Bryan G

An investor putting funds into an insolvent has bargaining power not the power to expropriate.

On the bonuses, if the transactions are fraudulent, then there are appropriate legal remedies.

More generally, I am surprised that you seem to put such little stock on the importance of the rule of law and its potential fragility. It is the kind of thing we take for granted when it is working well, but easily enough undermined when populism gets the upper hand.


I think what is at issue here is the banks’ creditors and not fairness to the banks themselves. Just to clarify, I suuport the imposition of losses on unguaranteed creditors of insolvent banks. But it is a fine line between legitimate loss sharing and expropriation.

@John McHale

I don’t see where any expropriation is occurring with the banks. In a liquidation the subs would get nothing. I’ll admit that the lack of a pre-existing legal framework means that things are not as clean as they should be, however I doubt a High Court judge would award anything to the subs given the circumstances.

In terms of the bonuses a new owner could say that you can either keep your bonus or keep your job and let each employee decide. The power to hire and fire comes with being the paymaster.

So I do not see these actions as being outside or disregarding the law. Rather I see them as examples of capitalism in action. Sometimes capitalism can be harsh.

@ John Mc

financial institutions have long been considered “different” types of corporations requiring different legal frameworks, particularly in regard to insolvency/rights of creditors. For one thing, only the Central Bank Governor can petition the High Court to wind them up, unlike other forms of limited company. It does not seem too bizarre to suggest a different process in the event of insolvency either in order to keep them as a going concern. Creditors are afforded much greater levels of protection in a financial institution than in any other form of corporation, so it would seem logical that their rights may be more ‘flexible’ as well in order to maintain financial stability. That we’ve never had to actually implement this ‘flexibility’ in recent times is the only reason the notion seems unusual or potentially unfair.

Just one or two observations. In response to Karl’s question about why this couldn’t have been done 2 years ago, I think we might need to consider the protection the Troika deal now provides (expensively) from the bond market – which was not available up to now. And as to the second, I expect this might be a blunt pre-cursor to something that will be developed eventually – but before 2013 – on an EU-wide basis.

And re the J McHale/Bryan G/Hogan exchanges, I find myself instinctively on John’s side. It is, and should be, a fundamental principle that there should be no ‘taking without due process’. Two wrongs don’t make a right. Successive governments have seriously damaged the reputation of the Irish state by vouching for the quality and effectiveness of bank suprevision and financial regulation when this has proved manifestly to not be the case. And yes, presumably ‘sophisticated and professional’ investors placed their money foolishly and unwisely at risk in Irish banks, but responding to the howling of the mob for blood by wiping out these investments without what would objectively be considered as ‘due process’ would, in my view, be equally, if not more, damaging.

Yes, a line needs to be drawn between the burden of losses that will be carried by citizens and the burden carried by foolish investors, but the urge to swing from almost 100% protection of these investors to a total wipe-out should be resisted. Governments act by virtue of the delegation of the people’s ultimate authority via parliament. Citizens are on the hook here as well – and should remain on the hook. If they do’t like the system of governance that allowed governments to place them on the hook, then they should change it.


I don’t disagree with you that financial institutions are different, and hence the need for a special regime. But not all special regimes are acceptable. In my opinion, a regime with no explicit trigger other than consultation with the Governor I not accetable — even in emergency legislation. Neither is that overturing of the accepted ranking of liabilities. However, the bigger point is that this smacks of populism. With all its faults, this government had done well in this regard. But it seems t unravelling as we enter the endgame. While I hope it is just election focused rhetoric, I fear the opposition do not understand the stakes. There is more to reprentative democraccy under the rule of law than pandering to popular opinion.

The option of passing legislation to impose losses on subbies and/or senior bondholders and even government debt holders is always there.

The question it raises is whether first, it will be deemed constitutional and second, whether it will effect our reputation as a country that plays by the rules.

At first glance the procedure appears to be similar to a Compulsory Purchase Order

The act acknowledges in the long title that it is an interference with the property rights of the subbies.

This of course does not render it unconstitutional in and of itself but it does perhaps imply that issues such as the right to fair procedures come into play.

It looks like the minister has been delegated the power to decide how much will be repaid, albeit subject to taking into account certain considerations. I suppose that decision is probably subject to judicial review like all exercises of ministerial discretion.

The extent to which this constitutes financial suppression is debatable. The state has taken it upon itself to retrospectively determine who bears losses outside of a resolution. On the facts of Anglo and INBS this is clearly morally justified, and it is probably morally justified for AIB and BOI as well.

I would say a key problem is that this type of legislation could be viewed as first, unlike any legislation in the developed world, (outside resolution loss imposition and losses on debt imposed over the heads of existing equity that remains in place) and that therefore it makes Ireland a special place to do business.

A key concern would be that the state now proceeds to pass similar legislation that allows it to reduce losses in other ways. This combined with the questionable re capitilisation of INBS and the glaring need for the state to reduce its exposure to losses could tip the marginal investor away from Ireland.

I suppose the presence of IMF/EU oversight helps in this regard. This external anchor or restraint I would argue adds credibility to these policies as they seem to have the approval of these institutions who presumable would act as a restraint on the state introducing further measures that erode the rights of creditors.

Sorry, I did mean the creditors – bondholders and equity holders. The reputational damage of being harsh on creditors is limited by the obvious bustness of the banks and that this has been the case for some time.

I would be concerned about the effect that this would have on the ability of semi state companies to raise debt.

If losses can be imposed on creditors over the head of state equity in public companies then it could be considered that the rights of creditors to those institutions just took an albeit small step backwards


3bn is an awful lot of sub debt to have matured in 2 years. 3bn too late would of course be a big mistake although in the context of the putative 600bn Irish indebtedness it is quite small.

My guess is that next to no sub debt matured in those two years. Some was bought at a deep discount, maybe that discount could have been deeper still, would still be small beer IMHO.


Let’s take the two main classes of creditors in turn. For subs the government is required to introduce this legislation at this time under the terms of the bailout agreement:

Consistent with EU State aid rules, burden sharing will be achieved with holders of
subordinated debt in relevant credit institutions over the period of the programme. This
will be based on the quantum of capital and other financial assistance the State commits to
support specific credit institutions and the financial viability of those institutions in the
absence of such support. Resolution and restructuring legislation which will address the
issue of burden sharing by subordinated bondholders will be submitted to the Oireachtas
by end-2010.

The principle of the ‘virtual liquidation’ appears to underlie the thinking here. The bailout agreement is totally silent on all matters relating to senior debt. However I think the principle of a ‘virtual liquidation’ is equally valid for seniors. Assets would be liquidated over time, and apportioned both to depositors and seniors. Outside this process the government would top-up the depositors to make them whole. I would certainly not regard this procedure as a mob howling for blood without due process.

“3bn is an awful lot of sub debt to have matured in 2 years. 3bn too late would of course be a big mistake although in the context of the putative 600bn Irish indebtedness it is quite small.

My guess is that next to no sub debt matured in those two years. Some was bought at a deep discount, maybe that discount could have been deeper still, would still be small beer IMHO.”

This €3bn didn’t mature, it my estimate of how much we over paid to buy back these bonds while we didn’t have this legislation.

I would say this mechanism could be used for imposing losses on seniors so long as the losses so imposed were clearly less than the losses such seniors would incur in a liquidation.

So if on any reasonable estimate seniors would receive at most 85 cents on the euro, I cant see any principled distinction between imposing losses that equate to seniors receiving 90 cent on the euro.

What about an insolvent semi state? Could the state just pass a law that imposes losses on creditors of these institutions at a level determined by the minister then the state proceeds to recap the company perhaps pleading the national interest?

Does this act as a precedent that removes bankruptcy from the courts and places the decision as to how much creditors receive in the hands of the minister?

Where do you get your imaginationary figure fo 600 bn from?

3 bn is nearly 10% of what has been spent so far in bailing out the banks. Since it is borrowed money, it is more expensive still over the generation it will take to pay it back.

@ Hog

I don’t believe it either but a much greater mind than mine posits that our problem is this big, none other than Comrade Gurdgiev.

I am not accepting D_E’s surmise that 3bn of subbies matured in the last two years. If they did then of course we missed a trick. More likley that no subbies matured so early.

Confusing comments from Mac the Knife just now:


So no “default” on senior debt, but “negotiated restructure” instead? Or does “other debts” simply refer to subbies?

@ D_E

Was the discount not 80%? Are you saying we paid 3bn for 15bn of subbies? Anglo was a few hundred million, I seem to recall. Even with his vast powers I doubt whether AIB and BoI sub debt will be cancelled at much deeper discounts.

I would say that objections to this Bill fall into two main classes – objections to the principles involved and objections to some of the detailed measures.

As regards the principles my reading of the situation is that we are just implementing EU Commission policy. The sections on special managers, subordinated debt, transfer of assets and liabilities etc all map directly to equivalent EU Commission guidelines. In this respect this legislation may be viewed as the first national instantiation of the new EU-wide bank resolution framework. It is not another solo run.

The Commission guidelines don’t get down to precise legal measures – that is for each country to deal with and to figure out how to incorporate the guidelines into national legislation. In the Bill there are 67 pages of detailed legal procedures, and I think it madness for the government to introduce the legislation late on a Tuesday night and expect to push it through the Dail the next day, as seems to be the plan. At a minimum the opposition parties should be given a few days to prepare detailed amendments, on the basis that the final product may better meet the main objectives if given wider scrutiny.

@Bryan G,

I take your points as I have no desire to dig myself into a trench armed with ‘principles’, but I have a concern, which I think is shared by John McHale, that arming governing factions (which remain in denial about their culpability and are fighting for politcial survival) with these powers is a tad risky.

The FT reported last week that Danske Bank of Denmark has seen a spike in deposits to its Irish unit in a sign that foreign banks in Ireland could be benefiting from doubts over the solvency of domestic-owned lenders.

The Economist said last month that David Owen, chief European financial economist of Jefferies International, an investment bank, says that the deposits of non-residents in Irish banks were nearly €203 billion in September, a figure larger than the €166 billion held by domestic residents and than Irish GDP.

So what is the trade-oof between haircuts, downgrades and losing a large amount of overseas corporate deposits?

Hopefully the retail banks with foreign subsiduaries here will extend their lending in line with their increased deposits.

Only the latest anglo buy back was done at an 80%.
In previous buy backs the discount was far less than 80%.

@ Bill Hobbs

It may be the intention of the government to place AIB under special management but I still don’t understand what that has to do with “meeting central bank’s regulatory capital requirements”.

Simon Carswell has it today in the IT that changing the rules of the NPRF in allowing it to invest in unlisted companies is what facilitates injections of further capital for AIB in the event that it is fully nationalised and removed from the stock exchange.

If this assessment is to be matched with the Minister’s statement that the legislation allows

“for the injection of capital into AIB before the end of the year to make sure that the bank is compliant with the Central Bank’s regulatory capital requirements.”

The only conclusion from Simon Carswell’s analysis (if correct) and the Minister’s statement, is that AIB will be nationalised before the year is out and all shares will be written off. It means the likelihood of making return on any of the NPRF’s previous “investments” and soon extra €5.3 billion injection into AIB looks very unlikely. What happens to the NPRF “investment’s” once AIB is nationalised, will they be added to our national debt figures?

As unclear and nontransparent as ever!


“To be fair to Eoin, the real genius in his earlier contributions was to point out the difficulty of using similar assumptions or legal fictions to impose losses on senior bondholders. It is one thing to say that the financial position of a bank is so precarious that it is obvious the subordinated bondholders would have recovered nothing in a winding up; as Eoin correctly argues, it is much more difficult to identify what level of losses senior debt would have suffered in a hypothetical winding up.”

As far as i read it the legislation does not demand that subbies receive nothing – they can be compensated according to their estimated losses. Therefore there is no reason why this mechanism could not be used for seniors as well

I suppose one question is whether the reduced cost of the bailout as a result of this is move is or is not offset by any potential consequences to our reputation as a country that respects the rule of law and the enforceability of contracts.

The same question could be asked of imposing losses on seniors, assuming we could get the EU to change their minds

@ Christy

on seniors:

1. the EU dont want us to burden share, so issues there in terms of our reputation with both them and the markets

2. you could put losses, in theory, on seniors via this method but (a) much more difficult to extract significant burden sharing on them as you would then have to create a storyline with a really really severe capital impairment net of state support and (b) you’d have to ‘share’ any losses between depositors and seniors (and ELG and covered’s too i would assume? And ECB repo? Gets messy at that stage), so if you intend on making depositors whole later on, your real ‘effective’ burden sharing will be heavily reduced (ie at BOI you only have 5.8bn in ung’teed debt vs other parri passu committments including depo, cov bonds, elg, ECB repo, normal repo etc of 120bn+)


Id agree with the EU point.

However, I would argue this mechanism makes imposing losses on un guaranteed seniors much much easier not messier.

All you do is say every senior obligation is written down by 10 per cent and then in the next section of the act /order say all guaranteed obligations are hereby reimbursed.

No messy liquidation, examiner ship, or even court resolution – just quick effective ministerial discretion exercised in the interests of the state

On a broader and perhaps melodramatic level, the temptation of government by diktat is clear – its really efficient and easy – no messy legal rambling or such – the problems perhaps only become clear when the interests of the state diverge form the interests of the minister or it’s youre credit that they’re coming after

it always amazes me that people comment on something when they clearly haven’t read it.
BW 2 refers above to a total sum of €600 billion;this figure I suspect, is from the following blog post
where clearly it is about non-bank debt, rather than bank debt.there is a large number of comments under blog post, and a quick perusal of same might have cleared up some of the confusion.
However our correspondence Mr Woods seems rather more concerned with sneering at Constantine rather than engaging with his data… It was ever thus

@ Christy

you are right that it could potentially be done that way, but i suppose what i’m referring to is that we need to recognise what in practice this would entail, as so so so many people out there (not you) keep saying “give the seniors back nothing”, which is a truely ridiculous statement, but underscores how many supposedly learned people don’t understand bank balance sheets.

For instance, given the structure of BoI’s balance sheet, where ung’teed seniors represent < 5% of the entire senior-type capital/funding base, for every 1 euro of losses you can prove exist AFTER all existing equity has been destroyed (equity, prefs and subbies), you will manage to inflict real losses on creditors of 5 cents, assuming you re-imburse the rest. Not exactly a very efficient, or sufficient, way of sharing the burden given the large scale downsides which it will come with.

One thing i’ll note is that, throughout all of this, no one seems to have come up with any type of forecast or estimated involuntary loss sharing that they reckon they can put on seniors in even any type of extreme situation. I suspect it’s a relatively small number, and that, oddly, as previously noted, voluntary methods will be both the more common and more successful event in crystalising losses on bondholders.


I agree that loses on senior BoI would be especially problematic

What would you say about AIB?

For instance, if we freeze frame right now, what have been the total losses so far on its balance sheet, what was its pre-existing private capital (subbie + private equity) and what is total value of its outstanding senior obligations and how much of that is un guaranteed?

Assuming away the EU dimension for a moment, is there simply too little un-guaranteed senior debt left in AIB to make it worthwhile to burn them even if losses are as large Prof MK argues they are?



So who didn’t show up???

@ BL

Accoding to Comrade Gurdy’s spreadsheet the “€ interest bill per taxpayer” (his words) is €16,363 and rising rapidly. So even if the subbies “blunder” amounts to €3bn (and I question whether it is anywere near this) 5.83% of this is less than a half percent of the overall taxpayer burden. If this is comparing apples and oranges then Comrade Gurdy should desist from trumpeting these figures in the current debate as innocent ignorami like myself can be forgiven thinking that they are comparable.


the actual major flaw in The Ruskie’s analysis is that he forgets that corporations are rather significant payers of taxation in this country, and so are significant contributors towards the interest servicing of the state. As such, leaving them out of the “burden” calculations is a bit disingenuous.

I believe corporation tax by itself represents around 12% of all income tax receipts YTD (and actually will pretty much cover 2010 national debt servicing costs by itself), and that ignores excise duties, employers PRSI etc…

@ B_E_B

The major flaw is that the lion’s share of these interest payments are to other Irish taxpayers i.e. they are transfers within the domestic economy. Comrade is (IMHO disigenuously) creating the impression that this is an overwhelming burden of the State to the outside world. As it happens we are in the black vis a vis the outside world, thank you.

@ Paul Hunt
You say:
‘It is, and should be, a fundamental principle that there should be no ‘taking without due process’. Two wrongs don’t make a right”

I agree. The constitutional safeguards weren’t built up overnight. A civil war was fought on that.

You go on to say:
‘Successive governments have seriously damaged the reputation of the Irish state by vouching for the quality and effectiveness of bank supervision and financial regulation when this has proved manifestly to not be the case. And yes, presumably ’sophisticated and professional’ investors placed their money foolishly and unwisely at risk in Irish banks, but responding to the howling of the mob for blood by wiping out these investments without what would objectively be considered as ‘due process’ would, in my view, be equally, if not more, damaging’

Our governments haven’t just damaged the reputation of the Irish state, although that’s bad enough. They have gambled away our economic development prospects and sentenced many able people to poverty and emigration. They were assisted in that debacle by a pasive opposition and an irresponsible professional class. Something has been rotten in the state of Denmark, and it’s not something petty or marginal.

The professional investors were sophisticated, but they succumbed to the bonus focussed, yield-chasing hubris of the Great Moderation. One for you and two for me and round we go. Given the amount of hi-cal derivatives the EZ core banks were swallowing, investing in Irish banks and property must have seemed like health food.

The High Priests of the ECB sat solemnly over it all. Normal workings of the market. Asset inflation not a problem. Efficient allocation of capital. All very dynamic. Humungous profits for the EZ banks. No need to worry about the national regulatory structures of the periphery as long as they were able to accommodate the big credit pipeline.

Let’s face it. The core EZ banks blew Ireland up like a frog. We had no capacity to resist.

‘..Less Developed Countries are inordinately sensitive to changes in external conditions because of their reliance on capital inflows…
M Pettis The Volatility Machine OUP.

Now we are looking down the barrel of a sovereign bust, and they are looking at a trillion euro wipeout. No wonder M Trichet is nervous.

No one is suggesting there is any easy road, and all comments above are much appreciated. Citizens are, as you say, on the hook. They may not understand finance, but they sure don’t like the conduct in the financial service industry. It ain’t decent.

It is likely that the constitution, and the right of private property is going to be tested severely, and not just in the courts. Extreme views will get a hearing in a crisis. The challenge is to create a form of burden sharing which is genuinely equitable, politically feasible, and economically sane. Another sort of Peace Process perhaps, and equally challenging.

@ P_Q

“The core EZ banks blew Ireland up like a frog. We had no capacity to resist.”

Who is to blame? – the bar tender who keeps serving the alcoholic or the alcoholic?


As Krugman says, the economy is not a morality play, so I suppose I should simply point to systems problems and perverse incentivisation. That led to looting of corporations, including banks, by senior management, socially destructive professional practice and pork-barrel politics. We know now that modern management and ICT is really not protective against the oldest flaws in human nature, and may even amplify them.

Yves Smith and many others have rightly critiqued the economics profession and instituitions for buying (and allowing themselves to be bought) into the global credit bubble of the last 30 years. Lessons surely must be learned. Closer to home, Joe Lee has given a masterly synopsis of our governance issues since independence. His analysis goes far beyond partisan considerations, and is, I feel, a most valuable resource.

Now that we’re hitting the rocks harder, the only way to keep the blame/reaction factor in check is to move as rapidly as possible towards reform. I believe this blog is of the huge importance in moving beyond ideological divisions, and separating the financial/technical from the political problems.


Speaking of Time, there has been far more time, effort and discussion on Bank Resolution on this blog since its inception ….. compared to time allowed for discussion in Houses of the Oireachtas … where, in essence, some of the dictatorial powers needed to facilitate a ‘dictatorial transformation’ of an abjectly failed system are enacted.

My primary and immediate concern is that this power is now in the hands of those who failed to grasp its nettle and potential much, much, earlier in this crisis and most of the damage is now done. With what little undone damage and leverage we have left might this not be an opportune time for this lot to GO.


Q3 GDP up 0.5%, Q2 revised to -1.0% vs -1.2% previously stated.

Q3 GNP up 1.1%.

This marks the first time that both GNP and GDP have been positive since Q4 2007, and first time since Q1 2008 that GNP has registered back-to-back GNP growth for 2 quarters. GNP now flat on the year, though with the EU/IMF bailout, the budget and the bad weather, obvious danger of Q4 falling back due to poor sentiment across the economy. That said, imagine hotels and restaurants have been doing impressive business as a result of all our foreign visitors in recent months…

Export led recovery still continues impressively, exports up 3.8% q/q, 13.2% y/y.

@Eoin Bond:
I was just about to do a bit of JtO-channelling myself, to call attention to Ronan Lyons’s piece here in which he says:

“This is a far cry from claims that mortgage arrears will cast losses on banks that will make NAMA look like a sideshow.”

Essentially, he thinks it unlikely that the arrears problem will be anything near as bad as Morgan Kelly thinks.

I apologise for dragging it in to this thread, where it doesn’t belong (indeed it probably deserves a thread to itself), but there hasn’t been an opportunity to mention it elsewhere. I feel sure that JtO would want it to be mentioned ….


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