Matthew Elderfield, Head of Financial Regulation at the Central Bank of Ireland in an address on March 22, 2011 commented that "to enable the Irish banks to meet the required international metric of liquidity, the Irish banking system will have to be slimmed down and right-sized over time." Following a recent change in government, the new Government and the Central Bank are actively implementing new legislation and regulatory measures to fulfil our commitment to overhaul, right-size and improve the banking system.
This Article provides a brief overview of recent legislative measures enacted or proposed which aim to shape, mould and assist in restoring the Irish banking system in line with requirements of the EU/IMF Programme. This Article is not a comprehensive account of such legislation and specific and detailed advice ought to be obtained on matters outlined below.
To allow for efficient and effective rightsizing the former government enacted legislation in the Credit Institutions (Stabilisation) Act, 2010 (December 2010) to provide for the reorganisation and restructuring of the retail banking system. In addition, in February 2011, a bill entitled The Central Bank and Credit Institutions (Resolution) Bill 2011 was presented to parliament with similar objectives.
- The Credit Institutions (Stabilisation) Act 2010.
The 2010 Act provides for the reorganisation and restructuring of the retail banking system as agreed in the joint EU/IMF Programme for Ireland. The Act conferred powers on the Minister for Finance, after consultation with the Governor of the Central Bank to direct the affairs of and restructure certain credit institutions and reorganise their assets and liabilities.
The Act is intended to cease to have effect on 31 December 2012 (although this date may be extended). The Act permits the Minister, following consultation with the Governor, to apply to the High Court seeking judicial order in support of;
- Direction Order - an order to direct a credit institution to take specific action or to refrain from or cease taking action.
- Special Management Order - an order to appoint for a period of 6 months (which may be extended) a suitably qualified manager to take over the management of a credit institution's business and to carry on as a going concern with a view to preserving and restoring its financial position.
- Subordinated Liabilities Order - applies to those institutions in receipt of financial support from the State, where the Minister may seek an order related to subordinated liabilities.
- Transfer Order - Minister may seek a transfer order in respect of assets of liabilities of a relevant institution.
The Act creates a number of judicial procedures which regulate and serve to check the exercise of the new powers by the Minister. Each order requires judicial approval and as such this safeguard is intended to serve as an objective review and assessment of the proposed action.
- The Central Bank and Credit Institutions (Resolution) Bill 2011.
The Bill was published on 28 February 2011 to make provision for an effective and expeditious resolution regime for certain credit institutions at minimum cost; amend certain existing enactments and permit actions related to main purpose. It seeks to confer on the Central Bank certain powers to take swift action in relation to distressed credit institutions and to protect the stability of the banking sector.
The legislation was initiated prior to the change of government (March 2011) and as prepared contemplates an effective date of 1 January 2013. It remains to be seen if the new government will require revisions to the legislation.
The 2010 Act shall cease to have effect from December 2012 (unless otherwise extended), and the 2011 Bill is intended to give effect to a more permanent resolution regime. The Bill will apply to all authorised credit institutions in Ireland and not just those in receipt of financial support from the government. However the regime proposed in the Bill will not apply to those institutions subject to the 2010 Act, unless the Minister agrees to disapply the 2010 Act. In the Bill, the powers of resolution are conferred on the Central Bank.
A summary of the purposes of the Bill include:
- To provide an effective and efficient resolution regime for authorised credit institutions that are failing or are likely to fail;
- To provide for a resolution regime for such credit institutions that is effective in protecting the Exchequer, the stability of the financial system and the economy
- support and respect the independence of the Central Bank;
- Establish the Credit Institutions Resolution Fund;
- To facilitate the orderly winding up of an authorised credit institution that is insolvent;
- Permit establishment of a bridge bank - entity to receive assets and/or liabilities of relevant institution;
- If specified intervention conditions (defined in the Bill) are met, empower the Central Bank to order transfer assets and liabilities of a relevant institution to a third party including a bridge bank;
- If specified invention conditions are met appoint a suitably qualified special manager to take over the management of credit institution;
- Empower the Central Bank to require an authorised credit institution to prepare and implement a recovery plan and the Central Bank to prepare and implement a resolution plan.
The 2011 Bill will not immediately apply to domestic institutions which are covered by the 2010 Act, but does apply to all other banks authorised to carry on business in Ireland, foreign owned subsidiaries and banks operating in the IFSC.
The legislative initiatives serve to reinforce Ireland's commitment to resolve and restore confidence of the public and greater transparency in the financial services sector.
This is to be achieved through the process of open and transparent regulation; effective and efficient resolution regime for failing institutions; and the active process of deleveraging and downsizing some of the existing institutions in an orderly and transparent manner. The proposed changes and the commitment of the Central Bank and the Government to implement such changes will assist in remedying some of the disparities in the system and with renewed confidence lead the institutions into the next decade.