Overview

The Department of Finance has published the Central Bank and Credit Institutions (Resolution) Bill 2011 (the Bill) which provides the Central Bank with the necessary powers to take swift and effective action in relation to distressed credit institutions and to protect the stability of our financial sector. The legislation was initiated in the Seanad by the last government and is currently at the First Stage. The new government may wish to make amendments to the Bill.

This legislation also complies with the obligations of the Irish Government under the EU-IMF Programme of Financial Support for Ireland to produce a special legislative regime to wind-up distressed credit institutions.

The Bill is intended to provide a permanent resolution regime for credit institutions in Ireland as the Credit Institutions (Stabilisation) Act 2010 (the 2010 Act) is a temporary measure for a period of two years (to 31 December 2012), unless further extended by resolution of both Houses of the Oireachtas.

To which institutions will the Bill apply?

The Bill will apply to "authorised credit institutions" which are Irish licensed banks, Irish Building Societies and Irish Credit Unions and is broader in its scope that the 2010 Act as it is not just limited to credit institutions which are in receipt of state support. However, while the 2010 Act is in force, a "Relevant Institution" under the 2010 Act will not be an "authorised credit institution" under the Bill unless the Minister for Finance disapplies a "Relevant Institution" from the provisions of the 2010 Act. Currently AIB, Bank of Ireland, Anglo Irish Bank, EBS Building Society and Irish Life and Permanent are covered by the 2010 Act.

What are the powers of resolution under the Bill?

The powers of resolution under the Bill have been vested in the Governor of the Central Bank unlike the 2010 Act which gave the Minister for Finance the key powers of resolution.

The two main powers outlined in the Bill are (1) the power to transfer assets and liabilities of a credit institution to a third party or pending such a transfer, to a "bridge-bank" (discussed below); and (2) power to make a special management order appointing a special manager to run an authorised credit institution. These powers are analogous to those set out in the 2010 Act and which are discussed in detail in our previous Client Alert.

The Bill sets out, in detail, the conditions that must be present before the Governor of the Central Bank can intervene to make a transfer or a special management order. Notice must be served on the authorised credit institution before an application to the High Court is made for such an order unless exceptional circumstances exist, such as an imminent threat to the financial stability, of the credit institution or the financial system in the State.

Powers of the Central Bank in the liquidation of authorised credit institutions

Appointment of a liquidator

The Bill provides that an authorised credit institution can only be wound up by the Central Bank by way of a petition to the Central Office of a High Court. No other person can present a winding up petition or take any steps to initiate a winding up of an authorised credit institution unless that person has given ten days written notice to the Central Bank and the Central Bank has confirmed that it has no objection. The Central Bank must approve all liquidators appointed to authorised credit institutions.

Objectives of a liquidator

The Bill sets out the main objectives of a liquidator of an authorised credit institution as follows:

  1. to facilitate the Central Bank in ensuring that the deposits of eligible depositors are protected by payment of the sum due to the depositor from the deposit protection account (as required under the EC (Deposit Guarantee Scheme) Regulations 1995) or by the transfer of that amount from the deposit protection account to another authorised credit institution to hold that sum on behalf of depositors; and
  2. to wind up the affairs of the authorised credit institution in a manner so as to provide the best results for all creditors of that institution.

Objective 1 will take precedence over Objective 2, but the liquidator must work towards achieving both objectives upon appointment. This is a new development as the rights of certain guaranteed depositors are given precedence over other unsecured creditors in a liquidation of an authorised credit institution.

Establishment of a liquidation committee

The Bill also provides for the establishment of a liquidation committee comprising two Central Bank nominees and one nominee appointed by the Minister for Finance. The liquidator must keep the committee apprised of progress towards the achievement of Objective 1. The committee must also make recommendations to the liquidator on appropriate ways of achieving Objective 1.

Recovery plans and resolution plans

The Bill provides that the Central Bank can direct a credit institution to prepare a recovery plan which would set out the actions to be taken by that credit institution to facilitate the continuation of its business (or part of its business) when in difficulty. Failure to comply with the Central Bank in relation to recovery plans will be an offence and sanctions can be imposed.

Where the Central Bank has directed a credit institution to prepare a recovery plan, the Central Bank may itself prepare a resolution plan which would set out the Central Bank's preparations on a contingency basis to exercise its functions under the Bill.

Other features of note in the Bill

Credit Institutions Resolution Fund

The Bill provides for the establishment of a Credit Institutions Resolution Fund (the Fund) to provide a source of funding for the resolution of financially unstable authorised credit institutions. All authorised credit institutions will be required to contribute to the fund at a rate to be prescribed by the Minister for Finance in respect of each institution. The Fund will be managed and administered by the Central Bank. The Central Bank will not contribute to the Fund but the Minister for Finance may contribute to the Fund. Any such contributions by the Minister for Finance shall be reimbursed from the Fund.

Bridge-Banks

The Bill provides for the establishment of "Bridge-Banks" which are to be private companies incorporated and wholly owned by the Central Bank for the purposes of holding assets or liabilities which have been transferred under a transfer order. Bridge-Banks are only intended to hold such assets or liabilities on a temporary basis pending onward transfer as soon as possible. These companies may be capitalised by the Fund and will be taken to hold a banking licence.

Credit Institutions Winding Up Directive

An order made under the Bill for the purposes of preserving or restoring the financial position of a credit institution will have effect in accordance with the provisions of the Credit Institutions Winding Up Directive of 2001 so that such orders may be recognised and enforceable in other EU member states.

Application of laws in relation to netting agreements

The provisions of this Bill will not affect the operation of legislation in relation to netting, financial collateral or other settlement arrangements.

Code of Practice

The Bill also makes provision for a code of practice in relation to the operation of the Bill to be issued, in consultation with the Minister for Finance.

Rights of Appeal to the Supreme Court

The Bill restricts the right to appeal for judicial review of any decision of the High Court.

Comment

It is anticipated that the incoming Government will make changes to provisions of the Bill and we will keep you up to date with any amendments.