Ciarán Lynch (Cork South Central, Labour) | Oireachtas source

-----I will just familiarise with the document again, at the end of paragraph 1 in the last ... basically what it says, the paper examines ... the paper examines these issues by reference to two key scenarios: a financial institution that is solvent but is experiencing liquidity problems and an institution that is insolvent or heading towards insolvency. It then goes on in paragraph 2 to talk about the term "constructive ambiguity", we might come back to what that actually means later on, and it then on the next page, it talks about scenario 1. This is what would happen if a financial institution ... so we now know that this is being discussed in early 2008.

Scenario 1 [is] An institution that is illiquid [or illiquid but in]solvent. If an institution is experiencing liquidity difficulties and has exhausted any opportunities for accessing liquidity in the wholesale [market] the first step must be for it to seek liquidity from the European Central Bank (ECB) in [formal] operations.

It talks about in the next paragraph, the role of CBFSAI in this situation, "The authority responsibility for the provision of ELA to an illiquid institution is CBFSAI." And then further down that paragraph just beyond halfway it says, "Therefore if there is any concern that a financial institution seeking ELA is insolvent, the CBFSAI would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer."

Then on to the next paragraph 3.2 it says, "Department/Minister's role in this situation." It is quite explicit it says, "Traditionally, it would [not] be considered that the Minister for Finance does not have a specific role when an institution is illiquid but solvent and there is no legal role for the Minister in such an event."

We then move on to paragraph 4 and scenario 2, "An institution that is insolvent (or approaching insolvency)." And it says:

If a period of liquidity continues it is likely that an illiquidity institution will move closer to insolvency. As referred to above, it is important to note that, from the outset, any major financial institution drawing on ELA will be in very serious financial difficulty and is likely to be in need of rescue.

That lays out the agreed themes of scenario 2. And then rolling on to paragraph 4.3, it says:

Role/Legal powers of the Minister in this situation.

As outlined above, if a sovereign bank sought ELA, the [Central Bank Financial Services Authority of Ireland] CBFSAI would be legally prohibited from extending it. However, if the bank was systemically important and the Government agreed to extend a guarantee to [its] liabilities, then this would turn it from an insolvent bank into an illiquid but solvent one (with the State bank guarantee backing up in its capital).

In layman's terms, the State is standing behind the bank, it doesn't matter how much illiquidity difficulties are in the bank, the State solvency de facto making the bank solvent. So CBFSAI could inject liquidity to prevent contagion effects into the wider system and this gives the Central Bank then the permission to get into the space.

It also talks about letters of comfort in the very last paragraph of that page, "'Letters of Comfort' is a somewhat loose term used to describe a form of written assurance to lending institutions or others in relation to borrowing or other financial commitments where there is no statutory power to guarantee or where guarantees up to the statutorily authorised level have already been given." Very last line of that paragraph then, "The CBFSAI's view is that a letter of comfort from the Minister to cover CBFSAI's risks would not be sufficient for the [Central Bank and Financial Services Authority] to lend to an insolvent institution ... - a comprehensive guarantee would be necessary."

We'll then go on a very, very good number of pages, as I said, scenario 1 has a whole load of sub-headings on it, scenario 2 has a load of sub-headings on it, and then it goes to scenario 3:

Unclear whether institution is illiquid or insolvent.

This paper details two scenarios: ... a bank that is liquid but solvent [or a] bank that is unequivocally insolvent or unequivocally approaching insolvency (section 4).

Which was the option that you were facing on the night, Mr. Cowen?