Mr. Aidan Carrigan:

I thank the joint committee for inviting the Department of Finance to discuss the draft heads of the Bill, the purpose of which is to enable ratification by Ireland of the intergovernmental agreement on the single resolution mechanism, SRM. The legislation is required to put the State in a position where its domestic law will be able to give full effect to the State's obligations under the intergovernmental agreement on the single resolution mechanism, thereby enabling Ireland to proceed to ratify the agreement.

The Bill is short. The core points are it is to provide for the functions of the Minister and the power to spend. These are the only aspects of the intergovernmental agreement that need to be dealt with in the draft legislation. The remaining commitments in the agreement are binding on the State and do not, therefore, require domestic legislation to give effect to them. Ratification of the intergovernmental agreement needs to be completed by the end of November at the latest to ensure the single resolution mechanism can become fully operational from 1 January 2016.

The purpose of the single resolution mechanism is to provide within a banking union context for a centralised resolution system which will be applied in a uniform fashion across all participating member states. The single resolution mechanism is the second pillar of banking union and will ensure that if a bank subject to the single supervisory mechanism, were to face serious difficulties, their resolution could be managed efficiently at minimal cost to taxpayers and the real economy through a single resolution board and a single resolution fund financed by the banking sector. What this means in practice is that should any of our three major banks get into financial trouble, the decision about putting it into resolution will be made by the single resolution board, rather than the domestic resolution authority. In addition, access to funds from the single resolution fund will facilitate the use of any of the resolution tools in respect of the national banks.

The single resolution mechanism complements the process of harmonisation which commenced with the development of the single rule book for banks in the field of prudential supervision and the development and implementation of the single supervisory mechanism, under which significant banks are now supervised directly by the ECB. It is an EU regulation and has direct effect. It applies to euro member states and any non-euro member state which is admitted after appropriate due process is followed. To date, no non-euro member states have signed up to the single resolution mechanism. The United Kingdom and Sweden, in particular, have indicated that they have no interest in joining, whereas Denmark seems to be more positively disposed to it.

The target level for the single resolution fund is at least 1% of the amount of covered deposits of all credit institutions authorised in all of the participating member states and is to be reached at the end of eight years. The figure is estimated to be in the region of €55 billion. We estimate that the contribution of Irish banks to the single resolution mechanism will be €1.8 billion to be paid over the eight years, which amounts to in the region of €225 million a year. The banks’ annual contributions will be calculated on the basis of their liabilities, excluding own funds and covered deposits, and adjusted for risk. The contributions paid will be a normal operating expense for banks, including State-owned banks.

The intergovernmental agreement was negotiated to enable the single resolution fund – a key element of the single resolution mechanism – to be operationalised. It was signed on 21 May 2014. A Government decision on 13 May 2014 approved this course of action. It covers the member states who are participating in the banking union and also provides that where the single resolution board is, for instance, successfully sued for damages, non-participating members will be appropriately compensated. The reason this needs to be addressed is that in such circumstances, the damages in question could only be paid from the overall EU budget rather than by the actual participating member states of the banking union.

The intergovernmental agreement will facilitate a gradual mutualisation of the single resolution fund over an eight year transitional period. It will do this through the creation of national compartments within the single resolution fund into which member states will transfer the contributions collected from their banking sectors. In practice what this means is that should a bank be put into resolution and recourse to single resolution fund moneys be needed to facilitate the resolution, the next step will be the provision of funding from the national compartment of the affected member state. After this, where additional single resolution fund moneys are needed, funds will then be obtained from the other national compartments. At the end of the eight year transitional period the single resolution fund will be fully mutualised, in other words, we will have a common pool from which funding will be drawn for the purpose of financing resolution actions, no matter where they happen within the banking union.

In summary, the main purpose of the intergovernmental agreement is: (i) to transfer the contributions raised at national level in accordance with the bank resolution and recovery directive and the single resolution mechanism regulation to the single resolution fund; (ii) to allocate during the eight year transition period the contributions raised at national level to different compartments in the single resolution fund corresponding to each participating member state; (iii) to facilitate the progressive mutualisation of these compartments in such a manner that they will cease to exist at the end of the transitional period; and (iv) to prescribe how the single resolution fund can be applied during the transition period. These changes could not be accommodated within the single resolution mechanism regulation because a number of member states argued that Article 114 of the Treaty on the Functioning of the European Union did not provide an appropriate legal basis to collect funds nationally and transfer them to a European fund. Consequently, it was agreed at the European Council that this issue should be dealt with through an intergovernmental agreement which could be formally ratified in accordance with national legal requirements in due time to permit the single resolution mechanism to become fully operational by 1 January 2016.

As the intergovernmental agreement was adopted intergovernmentally, it is necessary for each participating state to ratify the agreement, while at the same time ensuring it has the necessary domestic legislation in place to enable it to give full effect to its obligations under the agreement. In an Irish context, therefore, to give full effect to its obligations, there is a need for primary legislation as it is an agreement made outside the legal framework of the EU treaties and cannot be directly transposed. The Bill is short and the core points are to provide for the functions of the Minister and the power to spend. These are all that need to be dealt with in the draft legislation. The remaining commitments in the agreement are binding on the State and do not, therefore, require domestic legislation to give effect to them. Any cost to the Exchequer arising from the proposal is likely to be minimal. In this regard, it should be noted that the cost to the banks, including those owned by the State, will be borne by the banks and will not impact on the Exchequer. It will be a normal cost in conducting business for all banks across the banking union.

This is a small but very important piece of legislation which will enable Ireland to ratify the intergovernmental agreement on the single resolution mechanism which, in turn, if also ratified by other member states, will allow for the operation of the single resolution mechanism from 1 January 2016. I am happy to take questions and provide clarification to assist the committee.