Central Bank and Credit Institutions (Resolution) Bill 2011

The draft legislation for a permanent special resolution regime for failing banks has been published (see here).   The proposed legislation would replace the much-criticised emergency Credit Institutions (Stablisation) Act passed in December.

From a quick reading, the legislation appears a significant improvement on what it would replace.   The Governor of the Central Bank rather than the Minister for Finance makes the decision to trigger the regime.   The new legislation has well-defined triggers (Section 8), though it appears to leave a large amount of discretion with the Governor and lacks quantitative targets.   There also appear to be reasonable provisions for creditor protection (e.g., the possibility to appeal to an independent valuer when forced transfers of assets or liabilities take place (Section 31)).  I would be interested to hear opinions on whether these protections are sufficient. 

Strangely, according to the Irish Times, the new legislation might not come into effect for domestic institutions until the end of 2012 (see here). 

The legislation will not immediately apply to domestic institutions but covers all other banks authorised in the State, foreign owned subsidiaries and banks operating in the IFSC.

Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Nationwide, EBS and Irish Life and Permanent are covered by the Credit Institutions (Stabilisation) Act which was introduced late last year.

The objective of the new legislation is to shift the Irish institutions falling under the Credit Institutions (Stabilisation) Act to being covered by the Central Bank and Credit Institutions (Resolution) Bill before the end of 2012.

Update: Some additional useful links:

Simon Carswell gives his reaction here.   Suzanne Lynch provided a good overview of special resolution regimes after the emergency bill was published in December.    As linked to many times on this site before, Peter Brierley provides an indispensible international comparison of SRRs, with a focus on the UK’s regime.   The original emergency legislation — which remains in effect until the end of 2012 — is available here.

13 thoughts on “Central Bank and Credit Institutions (Resolution) Bill 2011”

  1. Am i the only one that finds it strange that this is now coming out when the Ancien Regime is going out?

  2. I don’t think it’s strange that the SSR doesn’t come into force until 2012: this is a key condition of the ECB, for two reasons. First, an EU-wide SSR is supposed to be in force by 2013. Since the Irish SSR allows for the Central Bank to take control of foreign-owned banks as well, there needs to be a common EU approach to address cross-border legal issues. Second, the ECB is against forced haircuts on senior bondholders and pre-2013 bank restructuring due to its fears of contagion. The future European Stabilisation Mechanism should be in place by June 2013, which is when all these new legislative instruments should be ready to tackle the next banking crisis. Nothing about tackling the present one – which is the EU’s major failure.

  3. @Brian
    This is when it was due on the EU/IMF schedule

    @John
    I’m more than a little concerned about the provisions for prior restraint (i.e. censorship) of publication of facts relating to the invocation of the act. Moreover, there are limits placed on judicial review of decisions made under the act. It seems the only justification for these curbs on freedoms otherwise normally enjoyed in Ireland (free speech and recourse to law) is their inconvenience to the unelected official who might seek to wield the dictatorial powers enumerated under the act. Why should the actions of the Central Bank be kept secret from the people and insulated from the rigours of the courts? The worst decisions of the crisis were all made in secret.

  4. To be frank, I’d like to see this issue developed along a constitutional dimension that would require the legislation to be put to a referendum. I am not proposing this to be cranky but given the scale of wealth and social destruction wrought on the country through the banking collapse, I believe the people should be consulted not just the Dail.

  5. Re:

    7.—In performing a function or exercising a power under this Act,
    the Minister and the Bank shall have regard to the laws of the European Union (including those governing State aid) and any relevant
    guidance issued by the Commission of the European Union.

    Does this mean, sign on the dotted line and we’ll let you know what EU laws you’ve signed up to later?

    Also

    “Credit Institutions Resolution Fund
    9.—(1) A fund, to be known as the Credit Institutions Resolution
    Fund and referred to in this Act as “the Fund”, is established.
    (2) The purpose of the Fund is to provide a source of funding for
    the resolution of financial instability in, or an imminent serious threat
    40 to the financial stability of, an authorised credit institution, and in
    particular—

    (3) The Fund shall be constituted by—
    (a) the contributions made by authorised credit institutions
    pursuant to section 12,
    (b) any sums paid into it by the Minister pursuant to section 10
    11, and
    (c) interest on those sums and contributions”

    Now who pays, and how much, and where do those funds from the minister come from, taxes? OK, some form of levy or insurance fund, but the absence of information here is ridiculous.

    “14.—(1) The Minister shall make regulations prescribing the rate
    15 of contribution, or a method of calculating the rate of contribution,
    to the Fund by an authorised credit institution. ”

    Again, what is this, a new power to be given to the Min Fin to legislate for a national levy to insure the national banks pay for a national banking insurance fund? What’s the detail of the levy, a fund to be financed by equivalent 1-3% on banking transactions, or 10% of profit, or how?

    Is this coming from the EU to ensure ECB is not on the hook for the setting up or management of such a fund forcing national central banks to do its job.

    There is no direct participation in the process given to the ECB therefore there is no responsibility role assumed by the ECB for this process. Is this just a method the ECB has assumed to get itself off the hook for any local banking collapse.

    A better scenario would have the ICB represented on a special board set up by the ECB to administer and report on windups and having the participation of other ICB’s across Europe on the same board. But this would compromise economic sovereignty further.

    One glaring omission is the lack of specifics on the collection of a digital record of all transactions in the bank that could form the basis of a criminal investigation. If there is evidence of criminality, full disclosure should be given to legal investigators and no priority assumed for commercial sensitivity or other similar devices used to cheat the law.

    Agree with Alchemist, we need a referendum on this following a public discussion of all the issues involved.

  6. At the risk of making a fool of myself.

    All banks will be made chaste, but some not just yet.

    Isn’t part of the problem that some banks were judged ‘systemic’ and some not – in Denmark at least? This was a political judgement. Isn’t there a danger that this legislation, which is future looking, will be trumped at some point by the ‘systemic’ argument yet again, some banks being more equal than others.

    Would it be useful to have some clarity, or definition perhaps, of what is a ‘systemic’ bank, and the special conditions attaching to them.

  7. Inclusion of credit unions is timely. Their trade body ILCU which maintains a small stabilisation fund is reported to have made losses of €43.5m last years stemming from €48m in guarantees and committments provided by its savings protection scheme to thirteen credit unions and €5.5m in investment losses. Its fund which has about €77m in uncommitted funds left to use, is also facing calls from seven more credit unions. It seems further losses are inevitable as one in five credit unions were unable to pay a dividend last year.

  8. Am I the only one who keeps seeing “end of 2012” in everything economic that’s going on these days? I see today that insurance premium equalistation (men/women) is also proposed to be in by end 2012.

    Is there some grand scheme within the unelected Europe for a big harmonisation by 2013, coming in from many different angles?

    I think we should be told.

  9. Does anyone have a summary of the features of the proposed regime? Is it a copy of the UK one?

  10. @Joseph

    Haven’t you seen the new movie, ‘2012’? It’s all there, the future, everything 🙂

  11. @Feargus,

    thx for link to Feargus O Raghallaigh
    Mark Kennedy
    4 February 2011 on SRR, great read and good overview of the issues involved. Their work takes a broad swing through all the literature on this subject. They write this snippet:

    “need for a unified SRR

    “Turning to the first aspect, an SRR must to our mind have the following key elements. It must provide for a state SRR entity which operates outside the provisions of normal insolvency legislation,
    empowered to take control of the bank, closing it for a short period to make an assessment of the position – usually no more than a couple of days. It would then reopen the bank and proceed to deal
    decisively with the positions of the various creditors, effectively providing for a haircut for creditors in order of ranking (first losses to shareholders, next to subordinate bond holders and other unsecured
    creditors, then turning to more senior bondholders, and so on). And the SRR entity should be able to recommercialise any remaining business lines of the bank(s) resolved, either by disposal piecemeal to market participants or by transferring to new ownership as a single entity.”

    One oversight is they do not focus enough on the European dimension of relationships between central banks across the EZ to the ECB. If there is a cross EZ mechanism SRR drawn up agreed upon by the various countries, this surely should encourage/enforce tighter regulation of state central banks and bring about a co-responsible and co-accountable and more effective eurozone. This could be centrally administered by the ECB as a regulatory structure with membership drawn from state central banks. This may be a difficult project politically, but if it can’t be done, let’s break up the euro:)

  12. More power to the elbow of The Governor, I’spose!

    150 not out … touch of the bank_galores wha? Wonder does he play cricket?

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