Ciarán Lynch (Cork South Central, Labour)
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I understand that the Minister must depart at 5.10 p.m. or 5.15 p.m. I welcome him and his officials before the committee this afternoon. The format of the meeting is that the Minister will make some opening remarks which we will follow with a question and answer session. I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off. Members are reminded of the long-standing rule of the Chair to the effect that they should not comment on, criticise or make charges against either a person outside the Houses or a official by name or in such a way as to make him or her identifiable. I invite the Minister to make his opening statement, following which we will have the question and answer session.

Michael Noonan (Limerick City, Fine Gael)
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We are now at the end of the 7th Irish Presidency of the European Union. I am happy to report to this committee that it has, in my view, been a very successful one for the Department of Finance and it has, in many respects, exceeded our expectations when we were planning the Presidency in 2012.

I wish to give the committee an overview of the achievements of the Presidency in the past six months. We had six formal ECOFIN Councils and one highly successful informal ECOFIN in Dublin. Much work was achieved in these Councils in terms of getting agreement on specific files and on managing the business of the Council. However, the Presidency is more than achieving agreement at ECOFIN - important as that is - it is also carried on in work in Council working parties, engagement with the European Parliament and engaging with the European institutions. There is also the practical organisational work which often occurs behind the scenes. Without all this work we would not have had such a successful Presidency.

The aims of the Presidency for the ECOFIN Council were set out in our list of priorities published at the end of 2012. We set ourselves a number of objectives under the broad thematic heading of stability, jobs and growth. We achieved much of what we set out to achieve last January, and I consider that what we proposed to achieve at that stage was, by any standards, an ambitious package of objectives. Indeed, in financial services we have achieved significantly more than was planned. We planned to carry out work on economic governance – principally in the management of the European semester process and in seeking agreement on the two pack of economic surveillance measures for the eurozone. In financial services we prioritised work on the banking union proposals designed to break the link between the financial sector and the sovereign. We targeted agreement on the capital requirements directive, the single supervisory mechanism, and bank resolution and recovery.

Ciarán Lynch (Cork South Central, Labour)
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I understand Deputy Donnelly must be in the Chamber at 4.30 p.m. With the agreement of other members, we will allow the Deputy to contribute first before resuming with the normal running order.

Stephen Donnelly (Wicklow, Independent)
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I thank the Chairman and Deputy Michael McGrath for allowing me to speak first.

As a member of the Opposition, I am either detached or semi-detached from the Irish Presidency, but it appears the Minister and his officials did an excellent job during the Presidency, even if one or two things did not go exactly as they may have hoped. The Minister, in particular, has been operating in a highly constrained environment in ECOFIN given the domestic politics at play in Germany, where a general election is imminent. I heard repeatedly from officials in Brussels that the Minister and his officials did a great job. Those with whom I spoke were very impressed with the Irish team at a political and an official level. I wish to acknowledge this publicly.

On the bank resolution mechanism, the technical note from the European Union is dense and complicated. I ask the Minister to request that his officials prepare for the joint committee a note explaining exactly how a resolution would proceed. Phase one involves a bail-in of 8%, phase two involves a 5% bail-in, and so forth. It would be useful if the Department provided one or two worked examples of a theoretical bank entering a resolution process, as it would help us to understand this complicated mechanism.

Before the most recent ECOFIN meeting, I understand the Minister's position was that he would seek to have small depositors take precedence over senior bondholders. I agree with that position, although the Minister will have to forgive me if I understood his position incorrectly. I was not able to figure out from the technical note whether this objective was achieved. Was it achieved, or will normal depositors and senior bondholders continue to be placed on an equal legal footing?

Michael Noonan (Limerick City, Fine Gael)
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I thank Deputy Donnelly for the good wishes and congratulations he extended to me and my officials, who are well worthy of the congratulations they received both here and in Brussels.

The bank resolution mechanism is complex because it is a new concept and new terms are being used. I will ask my officials to provide the Deputy with a user-friendly paper which breaks down the various ideas. I will try to simplify the process and perhaps it should be considered in the following manner. The Deputy will remember the concept of an institution being "too big to fail". The reason this concept was in the public consciousness, especially in the United States, was that a bank was considered to be too big to fail when its failure would bring down the sovereign. The opening position is that banks may no longer be too big to fail, which means not every bank that goes bust must be resolved. Instead of calling on taxpayers to bail out banks, the assets of the impaired bank will be used as a bail-in mechanism to liquify the assets to repair the hole in the bank in question. That is the general principle.

In proceeding with a bail-in mechanism, the assets covered by the bail-in are placed in a hierarchy, starting with the equity, followed by junior bondholders and, thereafter, senior bondholders. A guarantee will apply to deposits of up to €100,000, which will be sacrosanct and, therefore, exempt from the bail-in, and preference will be given to other depositors.

To distinguish between exemption and preference, up to €100,000 is guaranteed and exempt and preference would apply to individuals with deposits over €100,000 which would have preference, for example, over corporate deposits. The idea is that preference would be given to what, in law, is called "natural persons" with deposits over €100,000, that preference would also be given to SMEs with money on deposit and that the first line of deposits would be the corporate deposits of large corporations with large holdings. That is the way it runs on the deposit side.

Stephen Donnelly (Wicklow, Independent)
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Will SMEs and normal depositors with amounts over €100,000 have preference over senior bondholders or will they still rank the same as senior bondholders?

Michael Noonan (Limerick City, Fine Gael)
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They will. The legal link and the pari passu link between senior bondholders and depositors has been broken and all deposits will move to a lower level in the hierarchy of bail-in assets, as we discussed previously, but within that hierarchy the position has been nuanced and refined more and a differentiation has been made between natural persons with big deposits, over €100,000, and SMEs as against corporations. We can get the paper that has been requested.

In regard to the figures of 8%, 5% and so on, if a bank is bust and needs a rescue and cannot manage without help, there is a resolution authority which organises the bail-in. If the level of impairment is 8% of its balance sheet, all of the rescue will be by bail-in. If the level of impairment exceeds 8% of its balance sheet, it will move to the next phase, the next 5% of its balance sheet; an amount equivalent to the next 5% of its balance sheet can be accessed elsewhere - a resolution fund the sovereign might have or the ESM. In a very bad situation such as in the case of AIB, where the level of impairment exceeds 8%, plus 10%, andthere is still a level of impairment beyond 13% of its balance sheet, it again goes back to a bail-in and the resolution authority might return to the senior bondholders for an additional haircut or the ESM could be directly accessed at that point. In the first phase, in the case of the figure of 5%, there would be indirect involvement by the ESM because the sovereign would have to apply. However, for the tranche beyond the figure of 13%, if such a case arises in extremis, the application could be made by the institution directly to the ESM if it required recapitalisation. That is the general position. I am explaining it very simply, but we will get a paper for the Deputy which is not quite as simple but not as complex as a technical paper.

Stephen Donnelly (Wicklow, Independent)
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Perhaps with a worked out example to show how it works

Michael Noonan (Limerick City, Fine Gael)
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The Deputy can work the examples. I again thank him for his complimentary remarks.

Ciarán Lynch (Cork South Central, Labour)
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I thank Deputy Stephen S. Donnelly. Mindful of the fact that the Minister needs to leave by 5.10 p.m., I propose that the first round of questions involving the main Opposition parties be ten minutes. I can come back to members later if the need arises.

Michael McGrath (Cork South Central, Fianna Fail)
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I, too, compliment the Minister; the Minister of State, Deputy Brian Hayes, and their officials on their work at ECOFIN. I am aware that it has required much personal commitment in the past six months and in the period leading up to the start of the Presidency. I acknowledge all of the hard work done and the progress made on a number of important fronts.

Deputy Stephen S. Donnelly raised the point on which I was about to start concerning the common resolution framework which the Minister has explained. In respect of deposits above €100,000, the Minister has explained that there are layers beyond this amount. Will he clarify the relationship between the different layers of deposits over €100,000 and senior bondholders? Is it the case that the senior bondholders would take a hit first in all cases and only after this has been exhausted that any depositor would be involved in burden sharing? An explanation would be helpful in that regard. Will the Minister clarify if senior bondholders would take the hit first before any deposit over €100,000 would be affected?

Michael Noonan (Limerick City, Fine Gael)
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The hierarchy is equity, subordinate bondholders and senior bondholders. If one has to go further for additional assets, one goes to the depositors, for whom €100,000 is guaranteed. On the same line preference is given to larger deposits of natural persons and SMEs. What is part of the bail-in at that point is corporate deposits.

Michael McGrath (Cork South Central, Fianna Fail)
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That is fine. Will senior bondholders take the hit first?

Michael Noonan (Limerick City, Fine Gael)
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Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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That is an important development and to be welcomed. I compliment the Minister on getting it in place. I understand it will be 2018 before the bail-in procedures are fully applied. Will they apply in the case of banks that fail and also banks that require capital if there is a capital adequacy issue?

Michael Noonan (Limerick City, Fine Gael)
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Both. Often in the European Union, once a mechanism is put in place, it can be used informally. If bail-in becomes the new rule, it will be very hard for a Government to go back to a set of taxpayers and say it wants their money to bail out an institute. I do not think countries will have the legal arrangements in place and everything will be done until about 2016. There will be a gap between 2016 and 2018.

Michael McGrath (Cork South Central, Fianna Fail)
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Will it require the introduction of domestic legislation in every country?

Michael Noonan (Limerick City, Fine Gael)
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We have our own resolution legislation, but, yes, there will be domestic legislation also. It will be transposed from the EU directive.

Michael McGrath (Cork South Central, Fianna Fail)
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That is fine. It clarifies also the potential role of the ESM, depending on the scale of the issue within a bank, whether it is beyond the threshold figure of 8%.

Michael Noonan (Limerick City, Fine Gael)
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It builds in to the directive the manner in which the ESM can be accessed. One must think of the European Union. There are 18 countries in the eurozone. The countries that are not in it have banking systems that lend and borrow in the eurozone and right across the European Union. There are banks that work only in their own sovereign area, banks that work in the eurozone and banks that work in the eurozone and the countries outside it. A common set of rules is needed for the 27 member states and it has to work across all of them. Given that some are not using the currency, they have their own mechanisms for resolving bank issues. They had large resolution funds, for example, in Sweden. We had to vote on the issue of flexibility to allow for countries such as Sweden and the United Kingdom to ensure a harmonised system for the 27 member states and also an element of flexibility that would apply to all but where the original demand came from those that were out rather than in.

Michael McGrath (Cork South Central, Fianna Fail)
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Perhaps I can move to the single European banking supervisor. I listened carefully to the Minister's comments when he said it would relate to all major or systematically important banks and that there would be differentiation, depending on the size and significance of the banks involved. Will he translate for us what it will mean in Ireland's case in respect of the direct regulation of the pillar banks, for example, Permanent TSB, and other institutions? Will they all be categorised as being systemically important and falling under ECB regulation when it is fully up and running?

Michael Noonan (Limerick City, Fine Gael)
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There will be a common rule book and common protocols which, in the first instance, will be directed from Frankfurt. There will be a common set of rules and protocols which, in terms of regulation, will apply to all banks. Some banks will be regulated by the domestic regulator, while others will be regulated directly by the European regulator. If I recall it correctly - I will check with my officials - every country must have a minimum of three major banks under direct regulation. In the case of Ireland, that means the main banks will be directly regulated.

Michael McGrath (Cork South Central, Fianna Fail)
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Under the regulations.

Michael Noonan (Limerick City, Fine Gael)
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In a country such as Germany obviously there will be a minimum of three big international banks, but it will go beyond this.

Michael McGrath (Cork South Central, Fianna Fail)
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Will certain functions be delegated to the domestic central bank, such as site visits, inspections and that kind of work?

Michael Noonan (Limerick City, Fine Gael)
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All functions not within category 1 will be delegated to the domestic regulatory authorities, but they will have to regulate by the same set of rules and protocols. Also, a fail-safe mechanism provides that if the authorities in Frankfurt are worried at any point about a particular bank, they can override the domestic regulator and come in and take direct control of the regulation.

Michael McGrath (Cork South Central, Fianna Fail)
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Here, the pillar banks will be in category 1. Therefore, all direct contact between those banks and their regulator will be with the ECB directly. Is that the thrust of it?

Michael Noonan (Limerick City, Fine Gael)
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The three main banks in all countries will be directly supervised, but the ECB will obviously build a relationship with local banks also. How it will recruit and where it will establish the regulatory personnel are not clear. We do not know whether people will fly in from Frankfurt or whether a cohort of people will be housed in our Central Bank. I am not sure how the logistics will work, but I am providing the legal theory of what will happen.

Michael McGrath (Cork South Central, Fianna Fail)
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What are the consequences of this for our Central Bank? Clearly, it will still have a role in regard to non-category 1 regulated entities. What are the implications in terms of the resources that will be needed? Staff currently involved in regulating the pillar banks will no longer be doing that for the Central Bank. Is there a strategy involved?

Michael Noonan (Limerick City, Fine Gael)
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The authorities in Frankfurt can supervise through the local central banks, but the authorities will have the legal mandate and will direct how it should be done. They have the freedom to use local personnel when doing local regulatory work. However, the local personnel will not be the regulator.

Michael McGrath (Cork South Central, Fianna Fail)
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They may do the work as an agent of the ECB.

Michael Noonan (Limerick City, Fine Gael)
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Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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The Minister mentioned in his contribution that he hopes the deposit guarantee scheme will be agreed at European level. What changes are proposed in that regard? Does this mean, for example, that the €100,000 figure guaranteed here will be the standard across Europe? Will it be a standard figure and will the agreement have an impact on the deposit protection account the Central Bank currently holds? What are the key changes proposed for a common deposit insurance scheme?

Michael Noonan (Limerick City, Fine Gael)
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From the depositor point of view, we hope there will be no changes, because the €100,000 would be sacrosanct. It is sacrosanct here already, so this would mean no change. What would be organised in Europe is how this will be underpinned financially. We are talking about the size of the European fund underpinning the guarantee and the level of contribution from the financial institutions. The idea is that it would be financed by the industry. However, the mechanics of that have not yet been worked out. The next paper to come forward will deal with the mechanics of the fund underpinning the guarantee and how it will work and whether there will be some element of insurance in it or whether it will be a large fund contributed to by the industry. If there is a loss in a particular institution, it will have to be made good in full out of the fund for depositors with up to €100,000.

Michael McGrath (Cork South Central, Fianna Fail)
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Currently, there is more than €300 million in the deposit protection account with the Central Bank. If the banking system collapsed tomorrow morning, that would not go anywhere near meeting the requirements of the insured deposits of up to €100,000. Will there be an insurance element which will involve third parties?

Michael Noonan (Limerick City, Fine Gael)
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The detail has not been worked out yet. We have dealt with the CRD IV, which concerns the capital requirements and the matter of bankers' bonuses, which is attached to that. All of the work regarding supervision is now completed and we have the detail of that. The resolution directive is completed and we have the detail on that. Then, in principle, there is an agreement that there will be a fund underpinning the guarantee on deposits, either to replace or to add to domestic funds. The full logistics of that have yet to be worked out. The bottom line currently is that the €300 million in the Central Bank is underpinned by a State guarantee. Therefore, the guarantee is not limited to the amount that is in the fund. As I understand, that will be transferred to European level. We will have a banking union regulated centrally and separate from the sovereign bank. Therefore, the underpinning of deposits will be separate from the sovereign banks also.

Michael McGrath (Cork South Central, Fianna Fail)
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At present, that liability would run into tens of billions of euro. My final question relates to the budget process here. The Minister referred to the changes brought about by the two-pack agreement in Europe and our budget has been brought forward to 15 October. What is the role of the European authorities in regard to that budget? For example, is the Minister required to submit a draft of the budget to the European Commission in advance of our budget? What are the two-pack requirements which must be met in the lead-up to the delivery of the budget in the House in October?

Michael Noonan (Limerick City, Fine Gael)
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The draft is required in mid-October. I will explain the terminology in a moment. If we stuck to our traditional date, we would have to bring much of the detail of the budget out in draft form in October and then enact it. Therefore, it is much easier from our point of view to bring the budget forward to October. What Europe means by a draft is what we would normally do in December. It does not regard the full budgetary process as complete until the Finance Bill is enacted at the end of March. Therefore, its idea of a draft is not I would call a draft. The draft is the budget as presented on budget day. Then enactment completes the process. We will bring what Europe calls the draft forward from approximately 7 December to 15 October. We will then have some consultation with Europe and we will supply it with the budget. We will try to introduce the Finance Bill in the same calendar year. For those who are planning an autumn break on the snow slopes, they should expect the Finance Bill sometime between the budget and Christmas.

Michael McGrath (Cork South Central, Fianna Fail)
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Thank you.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am not sure whether too many people will be able to afford an autumn break. Hopefully, that was a hint that the Minister is going to ease up on austerity.

Michael Noonan (Limerick City, Fine Gael)
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You have to celebrate your second All-Ireland win.

Pearse Doherty (Donegal South West, Sinn Fein)
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True. That takes me back to the time the Minister said I was like the Donegal team, all defenders. Look what we did a year later, so just watch out.

Some of the questions I want to raise have been touched on already. In regard to the supervision of the major and systemically important banks, the Minister mentioned there is a minimum requirement of three in each member state. For clarity, which three banks here will be supervised and regulated by the ECB, and will it be only three? Three is a minimum requirement, but I presume it can go beyond that.

Michael Noonan (Limerick City, Fine Gael)
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The criteria have yet to be established, but it seems evident that AIB and Bank of Ireland will be the two. There could be a number of bids on the table in regard to the third. In regard to Ulster Bank, for example, the Bank of England is its regulator.

Pearse Doherty (Donegal South West, Sinn Fein)
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We regulate Ulster Bank in regard to its operations here. It has over 1 million customers here. Is it a minimum of three banks?

Michael Noonan (Limerick City, Fine Gael)
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It is a minimum of three for each member state.

Pearse Doherty (Donegal South West, Sinn Fein)
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Is it for the Minister for Finance to determine which the third bank will be or whether there should be a fourth?

Michael Noonan (Limerick City, Fine Gael)
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The relationship will principally be between the Central Bank and Frankfurt.

Pearse Doherty (Donegal South West, Sinn Fein)
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There is no clarification on the third bank here, but there will be a third one.

Michael Noonan (Limerick City, Fine Gael)
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The ECB will set down the criteria.

Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and it will base its choice on whether the banks selected are major banks or systemically important to the Irish economy. The Minister mentioned the bail-in and Deputy Donnelly also touched on that. Will the Minister tell us what effect the bail-in will have on pillar banks in which we have a shareholding - for example, AIB, which we nearly own completely, or Bank of Ireland? How will the bail-in affect our shareholdings, which are currently valued at approximately €8 billion or €9 billion?

Michael Noonan (Limerick City, Fine Gael)
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Our resolution has effectively been completed, and our banks are well capitalised. We do not envisage a bail-in coming on top of a bailout. We had a bailout and that is why we have the shares in the banks. This is for future cases when the policy has moved from bailouts, to which we all objected for a long time, to a bail-in system. Many people talked about burning bondholders during the election, and that is effectively what is happening now. The policy positions that the Deputy's party and my party and the Labour Party were advocating in opposition are the policies that are now in the resolution.

Pearse Doherty (Donegal South West, Sinn Fein)
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I noted the Minister's speech today about the lessons that have been learned, and I welcome the fact that the burning of bondholders is now accepted as the norm in the future. We are not suggesting at this point that the banks may need more capital, because we do not have the evidence, but there are stress tests and the troika are even insisting that we test this before they bid us farewell. I take the Minister's point that his view is that the banks are well capitalised, but if it transpired that one of the banks needed additional capital under the bail-in rules, would it be our shareholdings that would take the first hit?

Michael Noonan (Limerick City, Fine Gael)
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If one of our banks needed additional capital, the first option would be to raise it on the markets. That would be the obvious option to take. After that, an application to the ESM would be the next option. It is hypothetical.

Ciarán Lynch (Cork South Central, Labour)
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There are four of us and we can compare with one another and then conclude the session, if that is agreeable.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am happy with that. There is a bail-in procedure here. My understanding is that we could not go to the ESM without applying the bail-in procedure. Is it not the case that in a bail-in procedure, the first to take the hit are the shareholders, followed by junior bondholders?

Michael Noonan (Limerick City, Fine Gael)
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The Deputy is mixing up two questions. He is talking about a bail-in for one of the Irish banks and then talking about one of the Irish banks requiring extra capital. I am answering the second part of his question. If an Irish bank requires extra capital, the first recourse would be to the markets and the second recourse would be to the ESM. One would not regard it as an insolvent bank, but a bank that needed additional capital in the estimate of the ECB. Having rescued the banks and with constant monitoring from the Central Bank of Ireland, the Regulator and the ECB, I do not envisage a bail-in situation arising. An extra capital situation might arise.

Pearse Doherty (Donegal South West, Sinn Fein)
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Is the Minister saying that in respect of the ESM direct bank recapitalisation instrument, we would not have to follow the bail-in procedure before we were able to get access to funding from the ESM?

Michael Noonan (Limerick City, Fine Gael)
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What I am saying is that one must distinguish between resolution and recapitalisation. While there may be a hypothetical requirement for recapitalisation of Irish banks, especially when we move towards the end of the decade and the Basel III rules come in, I do not envisage any situation in which a resolution issue would arise again with the Irish banks.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am not envisaging a resolution issue either, but a recapitalisation issue. Under this instrument, the first people to take a hit before we could even get access to the ESM would be the shareholders. Is that not correct? Am I reading this wrong?

Michael Noonan (Limerick City, Fine Gael)
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No, that is for resolution. That is the sequence for resolution. As the bank gets resolved, its capital would have to be built up as well. One could have a bank needing capital - quite clearly, many of them will need capital, and this will be apparent next year - without any threat of resolution. They will just need additional capital. It has happened before. A bank would be given 18 months or two years to come up with a plan to put capital in place. Some would go to the market, which would be the obvious way to do it. The shareholder would come in; the bank would do an issuance and would try to collect extra capital from its shareholders, who would buy extra shares.

Pearse Doherty (Donegal South West, Sinn Fein)
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Just to be clear, if one of our banks required additional capital after stress tests were carried out next year, and it could not raise it in the international markets, it would have access to the ESM and this bail-in procedure would not apply.

Michael Noonan (Limerick City, Fine Gael)
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The Deputy is talking us into a situation. He is making it sound as if the Irish banks will need capital next year. They do not.

Pearse Doherty (Donegal South West, Sinn Fein)
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I just-----

Michael Noonan (Limerick City, Fine Gael)
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The trouble is that when one keeps repeating a hypothesis, it suddenly becomes a reality. There is no evidence whatsoever that any of the Irish banks will need additional capital next year. What is certain is that there will be stress testing next year, but the Irish banks are very well capitalised. I have no evidence at present that they require any additional capital.

Pearse Doherty (Donegal South West, Sinn Fein)
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I have no evidence at this stage either, but I just want to know if I am hearing this correctly. If the banks needed additional capital, would they able to go to the ESM for that capital, and is it the case that the bail-in procedures would not apply?

Michael Noonan (Limerick City, Fine Gael)
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The Deputy is again mixing up resolution and recapitalisation. I outlined the resolution mechanism, and he has transferred that to recapitalisation, which is a different concept.

Michael McGrath (Cork South Central, Fianna Fail)
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I asked earlier if all of this applied to both failing banks and banks needing capital, and the Minister said that it did.

Michael Noonan (Limerick City, Fine Gael)
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What I intended to say was that at a certain point in the process, when the bank is resolved, the issue would arise as to how much capital it has and how much capital it would require. We then work on that basis.

Pearse Doherty (Donegal South West, Sinn Fein)
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The Minister can clarify this. It may not happen and it hopefully will not happen, but if it did happen, could we get access to the ESM? We were sold this so strongly. There was no reluctance on the part of the Minister during the Lisbon treaty referendum to tell us that we had that lifeline in the ESM. If a bank needs further capital - I am not mixing this up - sometime next year, do we have access to the ESM before we apply for a bail-in, or do we have to apply the bail-in procedure first?

Michael Noonan (Limerick City, Fine Gael)
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When the ESM is fully in place, part of its mandate is to provide capital to banks that require capital.

Pearse Doherty (Donegal South West, Sinn Fein)
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Before or after we apply a bail-in?

Michael Noonan (Limerick City, Fine Gael)
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The Deputy has gone across the line again.

Pearse Doherty (Donegal South West, Sinn Fein)
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Jesus Christ, Minister - just answer the question.

Michael Noonan (Limerick City, Fine Gael)
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The Deputy is mixing up recapitalisation and resolution. He is trying to construct a theory on a false premise. I have done my best to explain it to him.

Pearse Doherty (Donegal South West, Sinn Fein)
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The answer is a very simple "Yes" or "No".

Michael Noonan (Limerick City, Fine Gael)
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No, it is not. There are very few questions that can be answered with "Yes" or "No", and bank resolution questions certainly cannot be answered like that when the question is being put by the Deputy.

Pearse Doherty (Donegal South West, Sinn Fein)
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Can a bank get capital through the ESM without the requirement for a bail-in, if it cannot raise money on the international markets and needs capital? I am wasting my time on this simple question.

Michael Noonan (Limerick City, Fine Gael)
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It may apply.

Michael McGrath (Cork South Central, Fianna Fail)
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Bail-in rules will not be there for five years anyway.

Pearse Doherty (Donegal South West, Sinn Fein)
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It is one year last week since the major game changer, or the seismic shift, as it was called at the time. The Minister presided over five ECOFIN meetings during the Presidency. There is one important line at the end of the five-page statement on potential retroactive application of the instrument. It has to be by mutual agreement and it must be on a case-by-case basis. We know that this procedure will not come into effect for a few years. Does retroactive application date from the time we bailed out our banks in the past, or is it from the agreement today? In other words, if this procedure is not available, the ESM is not up and running. If a bank runs into trouble, then a retroactive application can apply because the principle has not been agreed. When does the date of retroactivity begin? Does it definitely apply to us? Is there an understanding behind this text that retroactive applications include the dates on which this State recapitalised our banks?

Michael Noonan (Limerick City, Fine Gael)
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The seismic shift that Deputy Doherty referred to with a sarcastic tone has actually occurred, because the seismic shift was to break the vicious circle between the banks and the sovereigns. That was the seismic shift, as was the substituting of bailouts with bail-ins. We are bringing the resolution arrangements forward now, in consultation with the European Parliament. Eventually, they will be turned into a directive and have the force of law throughout the community. That is the seismic shift. The banking union will be like the banking union in the United States whereby the taxpayer will not be involved in bailouts. Instead, the assets of the banks will be used for bail-ins.

Deputy Doherty raised the retroactive question. It is retroactive from the time the ESM is in place and the detailed operational elements that are not settled yet will be settled. There is no commencement date. It is back before that time but there is no base date that prevents us from going back. I am working on the assumption that it applies to the Irish banks and it is on a case-by-case basis.

The Irish EU Presidency drove this and the Irish Minister for Finance ensured that this is in the regulations. Everyone knows the intention. How it will work in practice? I am approaching it like I approached the promissory note negotiations. I am opening up a new negotiation and it will be long and slow. We will move carefully to get the best result for Irish taxpayers. Working on a case-by-case basis suits us. The committee will recall the statements made by Chancellor Angela Merkel and President Hollande stressing the uniqueness of the Irish case, Ireland being a special case and so on. That is why we work on a case-by-case basis.

If I was to promulgate a negotiation that applied equally to Greece, Portugal and Spain as well as Ireland, we would not get beyond first base. The only way was to position this as a unique solution for Ireland because we were not allowed to bail-in the bondholders. The European Central Bank prevented us from doing that. According to the bank, it would have had a contagion effect in Europe. If we participated in preventing the contagion from spreading to the European banking system, then we have a case on which to build. Anyway, all these things are slow and must be carefully built. We will see how we go, but we are in the game all the time.

Dara Murphy (Cork North Central, Fine Gael)
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I congratulate the Minister on his work during the Irish Presidency. I am fascinated with the Minister's concept that we will pay ourselves and, therefore, I will be brief. My question relates to the tier 1 status and the top three countries which have access to the ESM. Will that be pan-European? Will Ulster Bank, ACC Bank and Rabobank, all of which have depositors in Ireland, be covered under the national country rules? Will the depositors of the Ulster Bank parent company in the United Kingdom have the same rules applied as the Ulster Bank depositors here?

Michael Noonan (Limerick City, Fine Gael)
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Yes, the same rules will apply throughout Europe when the rules are put in place. At present, Ulster Bank is a subsidiary of a bank that is regulated by the Bank of England. However, when we have a banking union the guarantees will be there and there will be a fund to guarantee them. We are unsure yet about how that will relate to the individual sovereign funds.

Dara Murphy (Cork North Central, Fine Gael)
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Is there any fear that there may be a competitive pressure on smaller banks, in other words, that there might be a flight of capital to the tier 1 banks generally and that this could be anti-competitive for smaller banks? Will people take the view that deposits will be safer in the bigger protected banks?

Michael Noonan (Limerick City, Fine Gael)
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We have the same banking system throughout Europe and it is controlled and protected by the European Central Bank. The only difference that can arise is on the cost bases of the banks, because the interest rates are fixed at European level. It is up to the banks in the individual countries to fix their cost bases. We hope for a common banking system whereby the price of money throughout the Union would be the same, or within acceptable margins, rather than the position now whereby one can get ten-year German money for 1.50% or 1.60% while ten-year Portuguese money was 8% last night.

Ciarán Lynch (Cork South Central, Labour)
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I will bring the meeting to a conclusion. I wish to add my own congratulations to the Minister. I commend you, Minister, and your officials on what was a very taxing six months - excuse the pun - for you and the Department. Well done on stepping up to the plate. You have shown once again that Ireland can be a leader and most effective during the term of the EU Presidency. I thank you and your officials for coming before the committee this afternoon.

Paschal Donohoe (Dublin Central, Fine Gael)
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I want to come in for a moment.

Ciarán Lynch (Cork South Central, Labour)
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It will only be a moment. You have two minutes. I am finishing at 5.10. p.m. If you want the Minister to respond, you must give him time to respond.

Paschal Donohoe (Dublin Central, Fine Gael)
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I have two questions for the Minister. One is broad and the other is specific.

Across the early phases of the banking union that the Minister has described, is it not likely that we could face the risk of real fragmentation within the European banking system? Let us consider what has occurred in the sovereign debt markets. For a while, the financial markets lent to countries as if no country could go bust. Ireland and Germany got money at the same rate as Greece. However, we are now going to be in a position whereby explicitly there will be a risk that banks can go bust and we will have a way of dealing with it. Financial markets will lend to banks pricing in that risk and one bank will lend to another bank pricing in that risk. Will we not face real pressure on the banking system during that period?

My second question is specific. A constituent who heard about the proposal on the radio put it to me that his family has all its money in a single joint bank account. It amounts to a little over €100,000. If a bank was to go under, then, in the context of a joint or family bank account, what is the bail-in risk that a joint account would face, as opposed to the account of an individual?

Michael Noonan (Limerick City, Fine Gael)
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I will address the fragmentation risk first. The European banking system is rather fragmented at present. I have just remarked on the different price of money in the different jurisdictions as represented by ten-year bond prices, for example, and that shows the level of fragmentation. We are trying to create a banking union with one set of supervision rules, resolution rules and deposit guarantee rules such that we remove the fragmentation. The process will be towards a unitary banking system rather like the United States. There will still be some variation depending on the cost bases of the banks. Of course people will price in risk when they are dealing with banks and the banks will price in risk when they are dealing with customers, but that is normal banking. I am suggesting that as it develops, as the European authorities insist that banks are absolutely adequately capitalised and as they carry out stress tests to measure the level of capitalisation - they will carry out stress tests again next year universally throughout Europe - the fragmentation will be taken out and, therefore, one of the primary purposes of the banking union will be achieved.

Paschal Donohoe (Dublin Central, Fine Gael)
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I have already given them that advice but I can go back and tell them that it has been endorsed by the Minister for Finance.

Michael Noonan (Limerick City, Fine Gael)
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The Deputy can say he has a friend who told him this might be a good idea.

Ciarán Lynch (Cork South Central, Labour)
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On that note, I think Deputy Donohoe is advised to spread his money over four or five institutions this afternoon.

Paschal Donohoe (Dublin Central, Fine Gael)
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I should make it clear that I do not have enough myself to get to that point. A single bank does me nicely.

Ciarán Lynch (Cork South Central, Labour)
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The guarantee more than covers him, like myself

Paschal Donohoe (Dublin Central, Fine Gael)
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Absolutely.

Dara Murphy (Cork North Central, Fine Gael)
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All their friends have €100,000.

Paschal Donohoe (Dublin Central, Fine Gael)
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A single constituent came to me.

Ciarán Lynch (Cork South Central, Labour)
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I thank the Minister and his officials for briefing us this afternoon. I understand there are a number of Council meetings in the next session when we resume and I look forward to seeing the Minister then. I do not believe there is any other business so I propose that the meeting be adjourned sine die. Is that agreed? Agreed.