Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

The resolution fund is part of the new rules for resolving banks or financial institutions entering insolvency. This is the purpose of the resolution policy. The essential difference for the taxpayer is that, instead of insolvent financial institutions being bailed out by the taxpayers, which is what happened in Ireland and elsewhere, they will be bailed in by accessing in the first instance their assets. The shareholders go first and have their assets bailed in, then subordinate bondholders, then senior bondholders and then corporate deposits. There is a guarantee that personal deposits of up to €100,000 are sacrosanct. There is a bail in process involving participants in the bank, either at shareholder level or lender level, and the taxpayer is not approached. This separates the banks from the sovereign.

If there are still losses in the bank after the bailing in, a backstop is necessary to provide additional funds.

The resolution fund can then be accessed. As that becomes mutualised, there will be a significant fund available to resolve the banks. Also, as a fund of €55 billion to €60 billion is insufficient for a banking system that has more than €30 trillion on its balance sheets, it can be leveraged up and borrowed against. During the initial phases of the process the different sovereign components can borrow from each other, thereby assisting the sovereign that requires additional resources. As a further backstop there is the ESM funding. That is the big difference. It is a movement from bailouts by taxpayers of insolvent banks to a bail in of the assets of the bank to resolve the bank and put it on a new footing. That is the principle difference.

It is hard to envisage some of these things before they happen. In the United States, there has been a common currency for years, the dollar, and a common banking system. It has been the case for a couple of hundred years that if a bank went bust in Texas it was not the responsibility of only the Texan authorities rather, they bailed in the assets and the Fed went in and assisted with it. What happened in Ireland with Anglo Irish Bank and the other banks would never have happened in the United States. The banking system there would have had to take the hit. This dates back to around 1790 in the US but is only now developing in Europe. We have moved from having a common currency with a defective architecture underpinning it in times of distress to a currency union supported by a fiscal union with the six pack, two pack, European semester and all the other systems mentioned by the Deputy, which is also underpinned by a banking union. What we are witnessing now is all of the elements of a functioning common currency area being put in place. The nearest analogous situation is the United States even though the mechanisms are different.