Mr. Aidan Carrigan:

I thank the committee for the invitation to brief it on the European Commission's legislative proposal for a single resolution mechanism, SRM, which is the next essential step in creating a European banking union. I am accompanied today by colleagues from the Department of Finance. As the Chairman outlined, the proposal is for a regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a single resolution mechanism and a single bank resolution fund and amending EU Regulation 1093/2010 of the European Parliament and of the Council.

The first step in creating a banking union for Europe was taken with the recent adoption by the Council and the European Parliament of the single supervisory mechanism, SSM, which was negotiated under the Irish Presidency. Under the SSM, responsibility for the direct supervision of the most significant credit institutions will transfer to the European Central Bank, acting jointly with national supervisors. The ECB will issue instructions, regulations and guidelines to national supervisors for tasks performed by them as part of the SSM. The ECB will take over its full tasks under the SSM in November 2014. The banking union will apply to all members of the euro area and any non-euro area member states which choose to opt in.

A complete banking union requires common supervision, deposit insurance and a common resolution framework, with an appropriate fiscal backstop. Following the adoption of the single supervisory mechanism, the European Council called for the creation of a single resolution mechanism for banks covered by the SSM. This is consistent with the principle underpinning the banking union that where supervision is centralised, resolution should also be exercised at the same level of authority. If supervision were exercised at the central level but resolution remained national, tensions could emerge between the EU-level supervisor and the national resolution authority over how to deal with an ailing bank.

The single resolution mechanism consists of a single resolution board and a single resolution fund. The fund will be financed by contributions from the banking sector. The board will generally make the initial decision about whether a bank needs to be put into resolution and will draw up the necessary plans and make a determination as to whether funding from the single resolution fund is necessary. However, without a treaty change, it is not possible for an EU institution to delegate policy-making powers to a subsidiary body such as the SRB. Therefore, the European Commission will take the final decision to trigger resolution and use the fund.

The basis for implementing resolution under the SRM will be the toolkit set out in the bank recovery and resolution directive, BRRD, agreed on by member states at the ECOFIN meeting that took place on 26 June under the Irish Presidency. This common toolkit for resolution will help ensure a reasonably level playing field across the EU between participating member states in the SSM-SRM, and those which decide to remain outside of it. Although the BRRD has yet to be finalised, trilogue negotiations are ongoing with the European Parliament and it is hoped agreement can be reached by the end of the year.

Before proceeding to outline the main elements of the proposal, I will briefly explain why a single resolution mechanism is considered necessary in addition to the bank resolution scheme already agreed by the ECOFIN Ministers. The purpose of the BRRD is to provide national authorities with common powers and instruments to pre-empt bank crises and resolve any financial institution in an orderly manner in the event of failure, while preserving essential bank operations and minimising taxpayers' exposure to losses. These powers represent a minimum harmonisation of the rules to be used in resolution. There remains, therefore, the potential for variations in how member states handle resolution.

In a banking union context, however, stakeholders generally agree that in a situation where the supervision of banks has transferred to the centre, resolution should take place at the same level. Without such symmetry, market expectations about member states' inability to deal with bank failures nationally could continue, reinforcing feedback loops between sovereigns and banks and fragmentation and competitive distortions across the Internal Market. Furthermore, the Commission is of the view that a strong single resolution mechanism is critical to ensure timely and least-cost resolution of banks. Its position is that the goal should be a centralised authority with power to trigger resolution and make decisions on burden sharing.

Ireland has welcomed the single resolution mechanism as the next essential step in creating a banking union. The SSM is now in place and the ECB will take over direct supervision in November of next year. Progress is being made in discussions with the European Parliament on concluding the EU deposit guarantee directive. The creation of the SRM with centralised decision making by a single resolution board and equipped with the resources of a single resolution fund, financed by contributions from the financial sector, represents a significant step in achieving the core objective of breaking the link between the sovereign and the banking sector.

I will now set out the main elements of the proposal as published by the Commission. In regard to the legal basis for the proposal, the SRM will be based on the Single Market treaty Article 114, which provides for the harmonisation of laws in member states in the pursuit of smooth functioning of the Single Market. The Commission's legal services have indicated that, in accordance with that article, the legal basis to proceed is sound. Treaty change would be required to make the single resolution board independent in its role and while there is a view that this might be preferable, the time required for such a treaty change did not fit into the timetable demanded by leaders and Heads of State - and, for that matter, by the financial markets - for the completion of the banking union. The Commission is of the view that the proposed governance structure, whereby it would retain the ultimate decision-making authority, is consistent with the Meroni principle, which requires that there should be no delegation of discretionary powers with a wide margin of discretion that would have the effect of transferring policy-making powers.

On the issue of scope, it is proposed that the single resolution mechanism will be directly responsible for the resolution of all banks - approximately 6,000 - in member states participating in the single supervisory mechanism. As is regularly recalled, relatively small distressed banks have been the source of considerable systemic difficulties. The proposal does not permit a differentiated approach similar to that in the single supervisory mechanism under which the ECB is responsible for the supervision of all banks but only directly supervises the most significant credit institutions because it is considered that the nature of the resolution process requires a high degree of centralisation of resolution decision making in order that successful bank resolution decisions can be taken rapidly. Irish credit unions are not credit institutions for the purposes of the capital requirements directive and consequently are not within the scope of the single resolution mechanism.

On structure and governance, while the Commission will make key decisions such as in respect of approval of resolution, the single resolution board will prepare and carry out the resolution of any bank in a member state participating in banking union. The board will apply the resolution toolkit as established in the bank recovery and resolution directive. The board will be composed of the executive director, the deputy executive director, representatives of the Commission and the ECB and the representatives of the resolution authorities of each participating member state. Under the proposal, the board would have two configurations, namely, the plenary session which would involve all member states' resolution authorities and the executive session. The executive board will be the key decision making forum of the single resolution board. Under the proposal, as published, the executive board will consist of the executive director, the deputy executive director, representatives appointed by the Commission and the ECB and the relevant national authorities of a credit institution subject to a resolution decision. Decisions will be made by simple majority, with the home resolution authority having one vote and all of the host resolution authorities collectively having one vote. The proposal makes a clear distinction between the role of the single resolution board and that of the national resolution authorities. The single resolution board and, ultimately, the Commission occupy the decision making level, whereas the national resolution authorities will be responsible for implementing all resolution actions decided on by the single resolution board or the Commission. If a national resolution authority does not comply with a decision of the single resolution board, the board or the Commission could directly address executive orders to the credit institution involved.

In practice, it is expected that the ECB, as supervisor, will indicate to the single resolution board that a credit institution in a single supervisory mechanism participating member state is in severe financial difficulties and that the matter should be resolved. The executive board of the single resolution board will prepare the resolution of the bank, including which resolution tools to use and how the single resolution fund should be involved. The proposal provides that the European Commission, acting on the recommendation of the single resolution board or its own initiative, can decide whether to place the credit institution under resolution. The national resolution authority would be responsible for implementing the decisions of the Commission or the board.

The Commission proposes that a single resolution fund be set up in order that funding support for credit institutions in resolution would be available. The fund would be built up over ten years through contributions from the banking sector. It would replace the national resolution funds of participating member states. The target level of the fund is 1% of covered deposits of single supervisory mechanism credit institutions, which should equate to between €55 billion and €60 billion. The single resolution mechanism is constructed with the objective that resolution will be carried out without recourse to national taxpayers' money. Instead, banks will contribute to the costs of resolution though the collection of levies and, where the fund is not sufficient, ,ex-postlevies. Under the proposal, the fund can "seek borrowings or other forms of support from ... other third parties". This could including market-based funding.

Until the single resolution fund reaches its target funding level, provision is made for the member state representative of the executive board to delay but not prevent resolution decisions where they might impinge on national fiscal responsibilities. This is a very sensitive issue for a number of member states and there has been much debate in the Council negotiations on the single resolution mechanism on an EU backstop that would guarantee a line of credit to the single resolution fund in such shortfall situations. Any money advanced by such a backstop would have to be repaid by the banking sector by moneys raised through the levy process.

In view of the high importance and complexity of this proposal, a high-level ad hocworking group of officials and experts from each member state was established. The group has met seven times in order to make progress on this file and has discussed various options for a possible overall compromise. As a result of these debates, the Council Presidency has drafted three compromise texts and is of the view that the third text - to the extent possible - addresses the main concerns raised by the member states. This text will be debated by ECOFIN at its meeting on 15 November. While negotiations continue and agreement has yet to be reached on all aspects of the proposal, Lithuania, the current Council Presidency, is prioritising the single resolution mechanism proposal. The October European Council called for agreement among member states by the end of the year in order to allow for the negotiations with the European Parliament and the co-legislators to reach agreement on the proposal within the current legislative term. Given that European Parliament elections are scheduled for the end of May 2014, this effectively requires agreement between the co-decision authorities by end of March 2014.

Ireland fully supports the creation of the single resolution mechanism as a significant and essential step in creating a credible banking union for Europe. We consider that the Commission's proposal provides a strong basis for a single resolution mechanism supported by an industry-funded single resolution fund. As stated, this issue will take up a large part of the agenda for next week's ECOFIN discussions. The Minister will be briefing the committee further on the matter next week.