Mr. Aidan Carrigan:

I am accompanied by colleagues, whom the Chairman has introduced, from the Department of Finance and the Central Bank to provide support. I thank the committee for the invitation to brief it on the Commission's legislative proposal to create a harmonised recovery and resolution framework for financial institutions. I acknowledge that the committee has facilitated us in having this meeting around the Easter period when the European Parliament and the European Commission have taken a break. This has allowed me to pull together my full team, which has been rather stretched with servicing meetings throughout Europe during the past three months. It is much appreciated that we can fit the meeting into this timescale.

The proposal before the committee and under discussion today is a proposal establishing a framework for the recovery and resolution of credit institutions and investment firms and amending various Council directives and regulations. The Commission's proposal for the recovery and resolution of financial institutions in difficulty was published in June 2012. It seeks to establish a standard framework for dealing with the recovery and resolution of credit institutions and investment firms in Europe and will provide member states with a common set of tools and powers to resolve institutions in difficulty. The overriding objective is to ensure that a bank's critical functions can be maintained while the costs of restructuring and resolving banks fall on the banks' owners and creditors rather than on taxpayers.

The overriding objective is to ensure that a bank's critical functions can be maintained while the costs of restructuring and resolving banks fall on the bank's owners and creditors rather than on taxpayers.

The current proposal will ensure convergence in how national authorities implement resolution actions. This is particularly important in the context of resolving large cross-border banking groups where co-ordination of actions and co-operation between national authorities in different member states is essential if we are to avoid costly break-ups on national levels.

The financial crisis in Europe has highlighted that authorities were often ill-equipped to deal with the resolution of banks in difficulty. Furthermore, given the high degree of financial market integration in Europe, the risk that problems in one member state can rapidly spread to several others has been clearly demonstrated. This backdrop sets the scene for the considerable efforts undertaken over recent years, both on a global basis and in Europe, to equip authorities with common tools and powers to resolve systemically important institutions with minimal disruption to the wider economy.

In 2010 the European Commission commenced a consultation around its plans for a union framework for crisis management in the financial sector. It held a number of consultations with experts and stakeholders, including experts from member states, the banking industry, academics and legal firms. Parallel to the EU consultation process in November 2011, G20 leaders endorsed the Financial Stability Board's key attributes of effective resolution for financial institutions. This internationally agreed standard sets out responsibilities, instruments and powers that national resolution regimes should have to resolve a failing systemically important financial institution. The key attributes also specify requirements for resolvability assessments and recovery and resolution planning for global systemically important financial institutions, SIFIs, as well as the adoption of institution-specific co-operation agreements between home and host authorities. In the EU context, efforts culminated with the publication of the Commission's proposal on bank recovery and resolution in June 2012. The proposal is largely in line with the FSB key attributes and has been welcomed by member states and internationally as a positive step towards rebuilding confidence in the banking system and its ability to deal with future crises.

At the June 2012 summit euro area leaders considered a report from President Van Rompuy prepared in collaboration with the presidents of the Commission, the Eurogroup and the ECB on strengthening EMU. One of the main proposals in the four presidents' report related to an integrated financial framework or, as it is better known now, a banking union. An integrated financial framework should have two central elements: a single European banking supervision system and a common deposit insurance and resolution framework. The June summit also affirmed the imperative to break the vicious circle between banks and sovereigns.

The first step towards a banking union was the creation of a single supervisor for euro area banks. The Irish Presidency finalised agreement with the European Parliament on the single supervisory mechanism on 19 March. The agreement provides that the ECB will supervise the eurozone banking system and banks of non-eurozone states that wish to participate in the single supervisory mechanism. The ECB will have direct supervision of banks with assets over €30 billion or an assets-to-national-GDP ratio of 20%, while national supervisors will continue day-to-day supervision of smaller banks in accordance with ECB guidance. It is expected that the ECB will commence its supervisory functions in mid-2014.

The current proposals on bank resolution are only to harmonise national regimes, so for now these functions will remain national competencies. A complete banking union would effectively centralise all of these and other national competencies, providing that banking policy in the EU, including regulation, supervision, deposit insurance and resolution, would be centralised. To this end the Commission intends to publish a proposal for a single resolution mechanism this summer.

The harmonised bank resolution framework builds on efforts by several member states to improve national resolution systems. It strengthens them in key respects and ensures the viability of resolution tools in Europe's integrated financial market. The proposed tools are divided into powers of prevention, early intervention and resolution, with intervention by the authorities becoming more intrusive as the situation deteriorates. I will explain these tools and how they operate in more detail. The main elements of the preparation and prevention stage are as follows. First, the framework requires banks to draw up recovery plans setting out measures that would restore the bank's viability in the event of a deterioration of its financial situation. Second, resolution authorities tasked with the responsibility of resolving banks are required to prepare resolution plans with options for dealing with banks that are in critical condition or that may no longer be viable. These contain information on the application of resolution tools and ways to ensure the continuity of critical functions. Recovery and resolution plans are to be prepared both at group level and for the individual institutions within the group. Third, if authorities identify obstacles to resolvability in the course of this planning process, they can require a bank to change its legal or operational structures to ensure that it can be resolved with the available tools in a way that does not compromise critical functions, threaten financial stability or involve costs to the taxpayer. Finally, financial groups may enter into intra-group support agreements to limit the development of a crisis and quickly boost the financial stability of the group as a whole. Subject to approval by the supervisory authorities and the shareholders of each entity that is party to the agreement, institutions that operate in a group would thus be able to provide financial support, in the form of loans, guarantees or assets for use as collateral in transactions, to other entities within the group that experience financial difficulties.

The next stage is early intervention. Early intervention powers are triggered when an institution does not meet, or is likely to be in breach of, regulatory capital requirements. Authorities could require the institution to implement any measures set out in the recovery plan, draw up an action programme and a timetable for its implementation, require the convening of a meeting of shareholders to adopt urgent decisions, and require the institution to draw up a plan for restructuring of debt with its creditors. Early supervisory intervention will ensure that financial difficulties are addressed as soon as they arise. In addition, supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation and the tools described above are not sufficient to reverse the situation. The primary duty of a special manager is to restore the financial situation of the bank and the sound and prudent management of its business.

The final form of intervention provided for, which was seen as the ultimate intervention in a crisis, is the power of resolution and the use of resolution tools. Resolution takes place if the preventative and early intervention measures fail to prevent the situation from deteriorating to the point at which a bank is failing or likely to fail. If the authority determines that no alternative action would help prevent failure of the bank, and that the public interest is at stake, authorities should take control of the institution and initiate decisive resolution action. The public interest includes access to critical banking functions, avoiding adverse effects on financial stability and protection of public finances. In such circumstances, harmonised resolution tools and powers, together with the resolution plans prepared in advance for both national and cross-border banks, will ensure that national authorities in all member states have a common toolkit and roadmap to manage the failure of banks. The impact on the rights of shareholders and creditors which the tools entail is justified by the overriding need to protect financial stability, depositors and taxpayers, and is supported by safeguards to ensure that the resolution tools are not improperly used.

Where preparation and early interventions are insufficient, the main resolution tools are as follows. The first is the sale of business tool, whereby the authorities would sell all or part of the failing bank to another bank. Then there is the bridge institution tool, which consists of identifying the good assets or essential functions of the bank and separating them into a new bank, often referred to as a bridge bank, which would be sold to another entity, following which the old bank with the bad or non-essential functions would be liquidated under normal insolvency proceedings. This would be followed by the asset separation tool, whereby the bad assets of the bank are put into an asset management vehicle.

This tool cleans the balance sheet of a bank. In order to prevent the tool from being used solely as a state aid measure, the framework prescribes that it may be used only in conjunction with another tool such as bridge bank or sale of business. This ensures that while the bank receives support, it also undergoes restructuring. Finally, there is the bail-in tool, whereby the bank would be recapitalised with shareholders diluted or wiped out, and creditors would have their claims reduced or converted to shares. An institution for which a private acquirer could not be found could thus continue to provide essential services, and authorities would have time to reorganise it or wind down parts of its business in an orderly manner. To that end, banks would be required to have a minimum percentage of their total liabilities in the shape of instruments eligible for bail-in. If triggered, these instruments would be written down in a pre-defined order in terms of seniority of claims in order for the institution to regain viability. In short, shareholders would bear losses first. Once shareholders' claims have been exhausted subordinated creditors would then be written down. Only when these claims have been exhausted could senior creditors be written down.

It should be noted that our domestic bank resolution legislation - the Central Bank and Credit Institutions (Resolution) Act 2011 - provides the Central Bank with tools for the resolution of credit institutions. It is focused on ensuring the resolution of an institution does not impact on the stability of the financial system. It was designed to be aligned with international best practice in this area and is broadly in line with the Commission’s proposal in that it provides for recovery and resolution plans, resolution tools, including a bridge bank tool, and the appointment of a special manager. The Irish regime also established a resolution fund which is being financed by contributions from industry. However, the issue of bail-in mechanisms was not fully developed at the time the Act was being drafted in early 2011 and no clear consensus had emerged on it. The concern was therefore that any pre-emptive action on our part by including bail-in type tools in our “steady-state” resolution regime in advance of agreement at EU and international level could have had significant consequences for banks within the scope of the resolution Act. Of course when the Commission proposal is finalised in the form of an agreed directive we will need to review our domestic resolution legislation to see what needs to change in order to fully implement the directive’s provisions including in relation to bail-in mechanisms.

In order to deal with EU banks or banking groups that operate across borders, the resolution framework enhances co-operation between national authorities in all phases of preparation, intervention and resolution. Resolution colleges are to be established under the leadership of the group resolution authority and with the participation of the European Banking Authority, EBA. The EBA will facilitate joint actions and act as a binding mediator if necessary. It will also have a role in developing technical standards or guidelines on particular matters and thereby strengthen the single rule book and protect the development of the Single Market.

To be effective, the resolution tools will require a certain amount of funding. For example, if authorities create a bridge bank, it will need capital or short-term loans to operate. If market funding is not available this supplementary funding will need to be provided by resolution funds which will raise contributions from banks proportionate to their liabilities and risk profiles. In other words, the costs of resolution are primarily borne by the institutions themselves and their owners and investors. The funds will have to build up sufficient capacity and the proposal sets a target level for member states' resolution funds to reach 1% of covered deposits in ten years. The Commission proposes that resolution funds should be used exclusively for supporting orderly resolution. National resolution funds would interact, notably to provide funding for resolving cross-border banks. The proposal also gives national resolution funds a right to borrow from their counterparts in other member states in the event that there are insufficient funds in their own resolution fund. This right to borrow is complemented with an obligation to lend to other funds within the Union. Safeguards are in place to ensure that no national fund shall be obliged to lend in circumstances where it would not have sufficient funds to finance a resolution in its own territory in the foreseeable future or where the loan required would exceed more than half of the available funds in the lending member state's resolution fund.

Deposit guarantee schemes, DGS, may be called to contribute to resolution in two ways. First, deposit guarantee schemes must contribute for the purpose of ensuring continuous access to covered or guaranteed deposits. Deposit guarantee schemes are currently established in all member states in accordance with Directive 94/19/EC. They compensate retail depositors up to €100,000. By contrast, resolution avoids the unavailability of covered deposits, which is preferable from the depositor's point of view. In that context it is considered desirable that the DGS contributes an amount equivalent to the losses that it would have had to bear in normal insolvency proceedings.

Second, while member states must at least use DGSs for the purpose of providing cash to ensure continuous access to covered deposits, they retain discretion as to how to fund resolution. They may decide to create financing arrangements separate from the DGS, or use their DGS also as financing arrangements for resolution under Article 91. Indeed, there are synergies between deposit guarantee schemes and resolution. When a resolution framework that limits contagion is in place, it reduces the number of bank failures, and therefore the likeliness of DGS pay-outs. The proposal therefore allows member states to use deposit guarantee schemes for resolution funding in order to reap economies of scale. Where the two arrangements are separate, the DGS is liable for the protection of covered depositors to the extent and in the conditions laid down in Article 99.

Before concluding, it would be useful to outline the position of the bank resolution proposal in the overall context of the integrated financial framework, IFF, or banking union, which is one of the key building blocks of a strengthened EMU. The other elements of a banking union are: integrated European supervision of banks in the form of the single supervisory mechanism, SSM; adoption of the capital requirements directive, CRD IV, which will, inter alia, facilitate the SSM’s implementation of a single rule book based on the Basel III accord; development of an operational framework for the direct recapitalisation of banks by the ESM; and a recasting of the DGS directive to further harmonise national deposit guarantee schemes.

The single supervisory mechanism is the first element of the package of banking union measures, and it is necessary now to conclude discussions on the remaining elements of banking union. In this regard the December 2012 European Council conclusions call on the co-legislators to agree on proposals for a recovery and resolution directive and for a deposit guarantee scheme directive before June 2013.

The draft bank recovery and resolution, BRR, directive is an important first step towards an efficient and financially sound Europe-wide bank resolution regime. It aims to provide a harmonised toolbox at EU level. Nonetheless, to overcome the challenges surrounding the orderly resolution of cross-border institutions, an independent European resolution authority is required to align the incentives of the single supervisory mechanism and the resolution function. To this end, a common authority, free of the constraints of national mandates, is needed to exercise the bank resolution function in an independent manner across the euro area. When banks are regulated and supervised at the SSM-wide level, a common resolution authority is the inevitable complement.

An additional element in the banking union initiative is a single resolution mechanism, SRM, and single resolution authority, SRA, to centrally manage the resolution of banks within the banking union. The European Council of December 2012 noted the Commission’s intention to submit a proposal for a single resolution mechanism for member states participating in the single supervisory mechanism to be examined as a matter of urgency during the current parliamentary cycle of the European Parliament. We understand this proposal will be presented by the Commission in the summer and consultations at EU level are already commencing.

To return to the bank resolution proposal, the file is a high priority for the Irish Presidency and we have been working very actively to achieve agreement at European Council level. We have held nine meetings of the expert working party in the first three months of the Presidency and the file has moved now to attaché level where the focus will be on the remaining political issues.

The intention is to progress to COREPER before the end of April so the bank resolution proposal can be discussed and, I hope, agreed at the May ECOFIN meeting, which will keep us somewhat in line with the timetable set for us by the Council. Following agreement at the meeting, trilogue negotiations with the European Parliament and European Commission will take place. As indicated, the intention is to include this by June 2013.

Ireland, during its Presidency of the Council, is affording top priority to the banking union package. In recent weeks, we have achieved agreement between co-legislators on the capital requirements directive and the proposal to establish a single supervisory mechanism. This in itself represents a significant milestone on the path to banking union. During our Presidency, we have invested significant resources in the bank recovery and resolution proposal, and we will continue to prioritise this file over the coming weeks with the intention of achieving a considered proposal that will have the broad support of member states. This will provide us with a negotiating mandate to move into discussions with the European Parliament. Committee members will be aware that during our Presidency we are required to reflect the views of all member states at the Council. We will, of course, act as an honest broker in discussions with a view to arriving at a workable final legislative proposal at Council level.

We will be happy to clarify any points made. Our team is available to deal with any questions.