Oireachtas Joint and Select Committees

Wednesday, 24 September 2014

Joint Oireachtas Committee on Finance, Public Expenditure and Reform

General Scheme of European Stability Mechanism (Amendment) Bill 2014: Discussion

4:10 pm

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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We are now in public session. I welcome, from the Department of Finance, Mr. Feargal Ó Brolcháin, principal officer, Mr. Pat McColgan, assistant principal officer, Mr. Cathal Sheridan, assistant principal officer in the international and EU division, Mr. Scott Rankin, deputy head of the shareholding management unit, and Mr. Antoine Mac Donncha, head of the legal unit. The format of the meeting will be that Mr. Ó Brolcháin will make some opening remarks, which will be followed by a question-and-answer session. I remind members, witnesses and those in the Visitors Gallery that all mobile phones must be switched off. I wish to advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing rule of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

Mr. Feargal Ó Brolcháin:

The purpose of this legislation is to make provision for the inclusion by the European Security Mechanism, ESM, board of governors, in accordance with Article 19 of the ESM treaty, of the ESM's direct recapitalisation instrument as one of the financial instruments envisaged under Articles 14 to 18 of the treaty. This includes provision for the creation of subsidiary bodies which could be used to implement the direct recapitalisation instrument. The legislation also incorporates the ESM treaty, as adapted following the accession of Latvia to the ESM on 13 March 2014, into the European Stability Mechanism Act 2012.

The euro area member states reached a preliminary agreement on the operational framework of the ESM direct recapitalisation instrument, DRI, on 10 June 2014. This includes the draft guideline on financial assistance for the direct recapitalisation of institutions, which set out how the DRI will operate. This has been provided to members. Establishing the DRI requires a decision by mutual agreement of the ESM board of governors, subject to the completion of national approval processes, to create a new ESM instrument in accordance with Article 19 of the ESM treaty. The aim is to have this process completed by November this year.

The Attorney General has been consulted and has advised that an amendment to the ESM Act 2012 will be required to allow the Minister for Finance, as a member of the ESM board of governors, to pass the necessary resolutions. In short, the reason we need to amend the ESM Act 2012 is twofold. First, the ESM was established to provide loans to member states. The DRI provides for loans to financial institutions on the basis of an application by a member state. Second, the DRI provides that subsidiary bodies and sub-entities may be used to facilitate such investments, so we must also cover that eventuality. While the ESM provides for limited self-amendment, for example, in Article 19 of the ESM treaty, to add to the range of financial instruments that can be used, these changes go beyond what the Dáil approved in the ESM Act 2012. That Act provided for the payment of Ireland's contributions to the ESM, and also made provision for the immunities included in the ESM treaty in Irish law. The ESM treaty, as it stood in 2012, was annexed to the Act.

Article 3 of the treaty states that the purpose of the ESM shall be "to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its member states". The key feature is that it provides for financial assistance to euro area member states.

Article 19 of the ESM treaty provides that the board of governors may review the list of financial assistance instruments provided for in Articles 14 to 18 and decide to make changes. The directory capitalisation instrument is being introduced under this article. However, as the direct capitalisation instrument was not in existence when the ESM was adopted and as it provides for direct assistance to a financial institution, it is considered that this expands the scope of the treaty beyond what was approved by the Oireachtas in the ESM Act of 2012, and an amendment to that Act to provide for the new instrument is therefore required. In addition, the draft guideline provides for the use of subsidiary bodies and entities of the ESM, including external investment, to conduct the actual recapitalisation. Although the treaty provides for ESM subsidiaries, the amendment provides for their use with a direct recapitalisation instrument.
The aim of the instrument is to preserve the financial stability of the euro area as a whole and of the member states by catering for specific cases in which an ESM member experiences acute difficulties with a financial sector that cannot be remedied without significantly endangering fiscal sustainability due to a severe risk of contagion from the financial sector to the sovereign. The use of the instrument could also be considered if other alternatives would have the effect of endangering the continuous market access of an ESM member.
The treaty as adapted following Latvia's accession to the ESM in March this year is being annexed to the ESM Act 2012 in both the Irish and English languages through this legislation to ensure the most recent version of the treaty is associated with the Act. Latvia applied to join the ESM on 21 August 2013, arising from its imminent accession to the euro. The arrangements for its accession to the ESM were dealt with in accordance with Article 44 of the ESM treaty. In October 2013, the ESM board of governors - the euro area finance Ministers - approved Latvia's application to join the ESM, along with the technical terms for Latvia's accession. Latvia joined the euro on 1 January 2014 and became the 18th member of the ESM on 13 March 2014, having deposited its instrument of accession 20 days beforehand.
As a consequence of Latvia joining the ESM, there is a need to adapt the ESM treaty to reflect this fact. The ESM treaty provides for limited self-amendment, as I mentioned. This includes adaptations arising directly from the accession of a new member under Article 44. Such adaptations are subject to the approval of the board of governors by mutual agreement, as indicated by Article 5.6.(l) of the treaty. The adaptations arising from Latvia's accession fall within these provisions. These changes were agreed by the board of governors on 23 October 2013, and as there were adaptations to the text of the ESM treaty to accommodate Latvia's accession in annexes I and II, it is considered appropriate to take the opportunity of this Bill to address this.
Latvia's accession led to a number of necessary technical adaptations to the ESM treaty, including the addition of Latvia to the list of member states; the amendment of Articles 8.1 and 8.2 to increase the total authorised capital stock and value of paid-in shares by the amount of Latvia's contribution to each; the inclusion of Latvian as an official language through the addition of a new paragraph to the final part of the main text of the treaty;and the amendment of Annexes I and II to the treaty to include Latvia's contribution key and share of the capital stock. These changes come about because the technical terms of Latvia's accession to the ESM approved by the board of governors include the calculation of Latvia's capital contribution to the ESM, with the capital contribution key set at 0.2757%. This means that Latvia's total capital subscription will be €1.93 billion, including €221.2 million in paid-in capital, which will be paid in five annual instalments of €44.24 million. Latvia has paid its initial instalment of paid-in capital and will make the four remaining payments annually up to 2018.
I will run through the heads of the Bill and I will then be happy to take any questions. The heads were provided to the committee in July and the drafting process has taken place since then. As is usual in such circumstances, the Bill when it appears will have the same content but will look more detailed and fleshed out. Head 1 states the aim of amending the ESM Act to allow for the inclusion of an instrument for direct recapitalisation of financial institutions in beneficiary member states as part of the amendment envisaged under Article 19 of the ESM treaty. Head 2 is to provide for amendment of the ESM to allow for the creation of the ESM subsidiary bodies, sub-entities and funds to implement direct recapitalisation. This can include provision for participation by the private sector in such direct recapitalisation. The purpose of this Bill is to extend the immunities of the ESM to such subsidiary bodies when they are involved with direct recapitalisation. Head 3 indicates that the ESM treaty, as amended following Latvia's accession, is annexed to this amendment Bill.

4:20 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I welcome the officials and thank them for the presentation. I will try to bring this back home and tease out the potential implications for Ireland. I know there are some transitional arrangements relating to the possibility of direct recapitalisation, but will the witnesses talk us through that? For example, if the ongoing stress tests by the European Central Bank reveal capital shortfalls in banks, this direct recapitalisation facility will not be available. Is that the case?

Mr. Feargal Ó Brolcháin:

The board of governors must approve it and the aim is for that to be done in early November, once the single supervisory mechanism, SSM, is operational. Once that is in place, there is the possibility that any member state can make an application on behalf of a financial institution to seek direct recapitalisation, subject to the conditions I set out and the aims. If there are acute difficulties which cannot be remedied without significantly endangering a member state's fiscal sustainability due to a severe risk of contagion, or if alternatives would have the effect of endangering the continuous market access of an ESM member, this could be used.

It was agreed in principle in 2012 that this instrument would be developed, and measures for banking union have since been put in place, particularly with regard to the EU bank recovery and resolution directive, BRRD, which sets up a cascade. The operational guideline circulated to committee members provides that such a cascade would follow through in advance of the instrument's application. That is what is envisaged. The instrument is one part of breaking the link and the banking union measures are another important part of that, especially the BRRD.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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There are transitional measures up to 2016 with regard to the cascading issue.

Mr. Feargal Ó Brolcháin:

That is correct. There is a transitional measure pending the cascade. That is explicitly set out in the draft guideline.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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How much will potentially be in the pot for direct recapitalisation?

Mr. Feargal Ó Brolcháin:

Euro area Ministers agreed that €60 billion of the ESM would be available for direct recapitalisation, with a cap at that amount.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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That is not being leveraged to raise more money. It is the quantum of money that is potentially available for direct recapitalisation.

Mr. Feargal Ó Brolcháin:

It is the amount available for the ESM. There is provision for private sector participation in any direct recapitalisation so, in principle, the amount could be increased by what the private sector would apply.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The €60 billion is not for a set period. If part of it is used, would the fund be replenished to the €60 billion level?

Mr. Feargal Ó Brolcháin:

No; there is a cap of €60 billion for all direct recapitalisation.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What happens when that is gone?

Mr. Feargal Ó Brolcháin:

The ESM would have to consider the position.

4:30 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The policy is that it is €60 billion for as long as it lasts.

Mr. Feargal Ó Brolcháin:

Yes, that would be it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Then there is the issue of the possible retroactive direct recapitalisation. Where does that fit with this?

Mr. Feargal Ó Brolcháin:

Article 14 of the draft guideline provides that there may be retrospective recapitalisation, to be decided on a case-by-case basis by the board of governors. The modalities for such implementation would be decided at the time. That is what the draft guideline states about retrospective recapitalisation. The provision is included and no further detail is available.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Again, the window opens for that application at the same time as the ESM is formally constituted.

Mr. Feargal Ó Brolcháin:

Yes, once the instrument is in place.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It is anticipated that will happen in November.

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Are discussions under way on the issue of retroactive recapitalisation between the ESM and officials in the Department on behalf of the Government?

Mr. Feargal Ó Brolcháin:

The Minister has answered parliamentary questions on this issue on a number of occasions when he indicated that such moves would be premature in advance of the instrument being in place.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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There are no discussions at this stage.

Mr. Feargal Ó Brolcháin:

On that issue, I refer the Deputy to the replies the Minister has provided, most recently last week.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Are there other direct implications for Ireland in this legislation?

Mr. Feargal Ó Brolcháin:

Will the Deputy clarify the question?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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An example would be the financial contribution to the ESM.

Mr. Feargal Ó Brolcháin:

No. Ireland's financial contribution is set. The overall capital contribution is set out in the initial ESM treaty at a total capital subscription of €11.145 billion, of which approximately €1.275 billion is paid in capital. We have paid all of that capital. This does not require it to change. The amount approved in the initial European Stability Mechanism Act 2012 would not change. If it did, the Minister would have to go to the Dáil to seek approval for an increase in the level of contribution.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In practical terms, if money is drawn down to meet a new capital shortfall, for example, and the Department goes through the relevant procedures and is successful and secures direct recapitalisation from the ESM, does the ESM then become a shareholder of the bank? What is its status? Is it an investment, equity or a loan?

Mr. Feargal Ó Brolcháin:

It would be an equity investment in the relevant financial institution. The extent of ESM ownership would depend on the contribution made by the member state and whether there was any private sector involvement. In the nature of an equity investment, there are different rules for how one deals with it from the point of view of accounting for it. In any investment the ESM makes it must make provision above that amount, essentially an additional provision, to allow for the possibility of risk. One treats equity investments in a different way from how one would treat loans. They are inherently riskier, which has an impact on the ESM's overall borrowing capacity. It is related to how the credit rating agencies view these matters.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Is it equity in ordinary share capital or preference share capital?

Mr. Feargal Ó Brolcháin:

It would depend. In order to remunerate the ESM's investment, there might be a need to take some preference share capital. The ESM will be borrowing this money and then investing it; therefore, it will have its own costs to cover. To cover them on an ongoing basis, it might need to take some preference and some ordinary share capital. It would have to be assessed on a case-by-case basis.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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If the ESM becomes a significant shareholder in a bank, presumably its representative will sit on the board with a right to participate and vote.

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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If it becomes a majority shareholder and effectively in charge of running a bank, how is that envisaged that will work? Will it have a separate unit for dealing with the operational activities of a bank?

Mr. Feargal Ó Brolcháin:

I referred in my opening statement to subsidiary bodies and sub-entities, as they are called. It is envisaged that there would be a subsidiary body, which would essentially be a division of the ESM and be called the ESM direct recapitalisation unit or some such title.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It would manage the investments.

Mr. Feargal Ó Brolcháin:

Yes. The subsidiary body could establish a sub-entity. The sub-entities would normally be envisaged where some private sector participation would be involved also. It would better facilitate it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Is there any provision for the ESM to pay more than the market value of shares? How does the valuation issue work?

Mr. Feargal Ó Brolcháin:

There are two issues with pricing. One is the ongoing cost, while the other is the pricing of the initial investment. It will be done on a case-by-case basis. In terms of paying more than the market value, in a forward looking recapitalisation that would be unlikely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In a retroactive one, is it case by case?

Mr. Feargal Ó Brolcháin:

I refer the Deputy to the text of Article 14.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I welcome the officials. With regard to the €60 billion in the ESM, is there any distinction in the amount an individual country can draw down from it?

Mr. Feargal Ó Brolcháin:

It has not been limited in any way and has not been assigned in any way to that purpose. However, an application will have to be made to the ESM and it would have to be approved by the ESM board of governors following rigorous assessment of the various aspects. It would be subject to the approval of the board of governors.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What is the composition of the board of governors?

Mr. Feargal Ó Brolcháin:

The board of governors comprises the euro area Finance Ministers.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It is a political board.

Mr. Feargal Ó Brolcháin:

Yes, it includes all of the euro area Finance Ministers, including the Minister for Finance, Deputy Michael Noonan.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Ó Brolcháin mentioned that Ireland had put in €1.275 billion.

Mr. Feargal Ó Brolcháin:

That is correct. It has been paid in capital. It is included in the annex.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Is it paid in cash?

Mr. Feargal Ó Brolcháin:

Yes, we have paid in instalments. We paid the last one in April this year.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In what is proposed, is there a distinction between current capitalisation and retrospective recapitalisation?

Mr. Feargal Ó Brolcháin:

There is. Article 14 of the draft guideline - it is a draft until approved by the board of governors - sets out the position on retrospective recapitalisation. The other articles deal with what we might call forward-looking recapitalisation.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What is the distinction? Obviously, Mr. Ó Brolcháin has looked at this in great depth; therefore, we will deem him to be the authority on it. Article 14 on retrospective recapitalisation has particular significance in the Irish context. What is the distinction between how the ESM looks at retrospective recapitalisation and current recapitalisation?

Mr. Feargal Ó Brolcháin:

The bulk of the guideline sets out in detail how the application will be dealt with, how it will be assessed, the rules relating to the cascade for a bail-in and so forth and makes provision for guarantees.

As I have outlined, Article 4 provides that the board of governors may do this, decide on a case-by-case basis, and the modalities will be decided when the decision on retrospection is taken. That is all it states.

4:40 pm

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In terms of current recapitalisation, it is relatively straightforward. There are procedures in place. In terms of retrospective recapitalisation, at this time, there is nothing on a procedural basis as such. Is that a fair comment?

Mr. Feargal Ó Brolcháin:

It states the modalities will be decided at the time the decision is made. It does not elaborate on what the modalities - to use the word in the guideline - would be.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In terms of current recapitalisation, they have specified how it would function.

Mr. Feargal Ó Brolcháin:

It is fully specified, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In terms of the timeframe, the Department expects the ESM to go through national parliaments by November.

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When is it expected that the single supervisory mechanism will be in place?

Mr. Feargal Ó Brolcháin:

My understanding is that the aim is to have the single supervisory mechanism in place by 4 November and to have the national procedures completed in time to take a decision shortly thereafter - possibly by 6 November.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Therefore, by early November, the single supervisory mechanism will be in place, with the ESM structure.

Mr. Feargal Ó Brolcháin:

That is right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Have they laid down timeframes or guidelines as to when an application can be made for recapitalisation, be it on an ongoing, real-time or current basis or on a retrospective recapitalisation basis?

Mr. Feargal Ó Brolcháin:

The guidelines set out a procedure for making an application.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Which involves a current application.

Mr. Feargal Ó Brolcháin:

Yes and then an assessment must be made. In the case of retrospective recapitalisation, the application would probably have to be made in the same way to the chair and one would then have to go through an assessment process also.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It has yet to be indicated what that process will be as distinct from the current procedure.

Mr. Feargal Ó Brolcháin:

That is right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In reply to Deputy Michael McGrath, Mr. Ó Brolcháin spoke about the €60 billion the ESM had. Is this direct capital funding from each member state? Is it based on the cash contributions from each?

Mr. Feargal Ó Brolcháin:

The ESM has total subscribed capital of €700 billion and the paid-in capital is €80 billion. It uses this capital base as backing for borrowing in the financial markets. It borrows the money and lends it for programmes such as the one we had, although we did not have ESM money, or in this case for direct recapitalisation. It will not be taking the paid-in capital and lending it out; it will use it as backing in borrowing in the financial markets.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Is it fair to say the ESM has leveraged? Of this funding, it just so happens that €80 billion has been provided by way of individual cash investments by member states. Is it just a co-incidence that the figure for the recapitalisation of banks is lower than that figure at €60 million?

Mr. Feargal Ó Brolcháin:

No. I have to be very clear on this point. The ESM does not lend directly the paid-in capital. The capital base of the ESM is the backing for its borrowings in the markets. All of the money the ESM provides through either programme lending or direct recapitalisation is borrowed.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Over what time period is it to provide for the €60 billion? Is it a one or two year programme?

Mr. Feargal Ó Brolcháin:

No, that is the cap set on the direct recapitalisation instrument.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No timeframe is indicated.

Mr. Feargal Ó Brolcháin:

The instrument is subject to review every two years and after ten years there shall be a more comprehensive review to assess whether it should continue.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The eurozone has a relatively large number of member countries. In the context of our own situation, €60 billion is lower than the burden the Irish taxpayer took on in terms of the banks. While it is a phenomenal amount of money, in the broader European context as opposed to Ireland, it is not enormous. The question arises as to what would happen if the €60 billion was gone after six months or one year. What are the mechanisms within the ESM to review it?

Mr. Feargal Ó Brolcháin:

There would obviously have to be a review at that time. The other point to note is that there are many other measures now in place, including the BRRD and others. The stress tests will have taken place and a great deal of work has been done on the banks in the meantime. While the possibility to which the Deputy refers is remote, in the event that the available amount was exhausted, the ESM would have to review the matter and consider whether it wanted to provide more.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can Mr. Ó Brolcháin see a situation arising where the ESM could take a controlling interest in Irish banks? It is a question Deputy Michael McGrath broached and an obvious one to ask. Would the ESM seek to take controlling interests in Irish banks if the situation arose or would it use a mechanism whereby it would keep a minority interest coupled with preference shares?

Mr. Feargal Ó Brolcháin:

I cannot say anything about what the approach would be to retrospective recapitalisation as any approach will be decided on a case-by-case basis.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In respect of head 1, for what exactly will the legislation allow? The general scheme states it will allow for the inclusion of an instrument for direct recapitalisation. Are we being asked in the legislation to incorporate a specific amendment to enable the board of governors to come up with an amendment or will the instrument be written into the legislation?

Mr. Feargal Ó Brolcháin:

It will provide that the existing provisions of the Act can also incorporate direct recapitalisation in order that the Act will then be understood to provide for the direct recapitalisation instrument. Second, it will provide for the immunities and privileges currently extended to the ESM to clarify that they will also apply to ESM subsidiary bodies and sub-entities established for the purpose of direct recapitalisation.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What legal status will the guidelines of the instrument have?

Mr. Feargal Ó Brolcháin:

They will be approved by the board of governors, subject to completion of all national procedures, of course. Assuming all that is positive, the guidelines will be as adopted by the board of governors and, until they are changed, will be the rule for the ESM.

Mr. Scott Rankin:

That means that the guidelines will not have any force in domestic law but will operate to govern the mechanisms by which the ESM will consider applications for direct recapitalisation. In effect, they apply to the ESM.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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On how this will work, we had an example earlier in which one of Ireland's institutions had a capital shortfall. Do the delegates agree that this is a far cry from separating sovereign and banking debt? This instrument will not separate them. Do they agree?

Mr. Feargal Ó Brolcháin:

No. This instrument is part of a broader framework to separate banks and sovereigns. This is one element to provide for direct recapitalisation where a member state is unable to provide for that recapitalisation owing to financial pressure.

The aim is to deal with the issues that would arise if a member state's inability to provide for recapitalisation was likely to cause problems or contagion. The aim is not to obviate it in every case. Some member states might prefer to engage in their own recapitalisation, rather than having the ESM take ownership of the bank in question.

4:50 pm

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The rules to which we are being asked to agree in this legislation will compel the State in future cases to bail out bust banks, or banks with a capital shortfall, if it is able do so. If we have resources, that is what we will be asked to do under the legislation. We will be asked to make a contribution towards a bust bank.

Mr. Feargal Ó Brolcháin:

No. As I have laid out, the aim of the legislation-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I would like to deal specifically with the waterfall or cascade provision. Will the officials explain how these rules will not oblige us to bail out a bank that goes bust?

Mr. Cathal Sheridan:

I will go through the bank recovery and resolution process. The fundamental underpinning of the process is to ensure the taxpayer is protected. I will explain how the system will operate. The additional tier 1 and tier 2 share capital instruments will be bailed in first. If that is insufficient, we will move down the waterfall using the bail-in tool within the bank recovery and resolution directive. Eligible liabilities of capital instruments that do not come within the first layer - senior debt and that type of liability - will absorb the losses. Obviously, the covered deposits are protected. The deposit guarantee scheme could make a contribution on their behalf if there were remaining losses to be absorbed. If there are further losses to be covered, we will reach the resolution fund stage. The banks are contributing to a resolution fund on an ongoing basis. From 2016, we will move into the single resolution mechanism, to which all member states will be contributing. Obviously, in the early years the prospect of there being insufficient money in the fund, if there is a big call on it, will be a big issue. A bridge financing process is being developed to try to ensure money is available for the fund. There will be a gradual mutualisation of the single resolution fund over the first eight years. The first port of call of a member state will be its own national compartment. As the years go by, there will be contributions from other national compartments. At the end of the eight years, there will be a mutualised fund whereby, in effect, all compartments will contribute to any resolution. That is the thinking behind the framework.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We are dealing with the ESM. Reference has been made to a figure of €60 billion. I would like the officials to clarify this. The national state will be asked to bail out the bust bank before the ESM will be asked to bail it out.

Mr. Antoine Mac Donncha:

There is nothing whatsoever in the legislation that imposes any obligation on the State to bail out a bank.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No.

Mr. Antoine Mac Donncha:

I will explain what the legislation will achieve. It will enable the ESM to engage in direct recapitalisation. That will only be permitted in particular circumstances. It is true, as the Deputy has pointed out, that the ESM will not be permitted to make that contribution other than in circumstances in which some of the difficulties that have been outlined would result if the State were to do it. The conditionality set out in the treaty would have to be met. The ESM will be only able to make a direct recapitalisation in limited circumstances where these thresholds are met. There is nothing at all in the legislation that imposes any obligation on the State to bail out any bank. The legislation allows the ESM to bail out the bank - not across the board and not without limitations - in certain circumstances.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I thank Mr. Mac Donncha for his answer. My point is that the State has to bail out the bank first, as long as it has the resources to do so, if the ESM is to be accessed. It is a far cry from separating sovereign debt and banking debt. If we are to access this €60 billion, if we have the wherewithal to do so, we will have to use our own resources - our hard-earned taxes, etc. - to make a contribution before the ESM can step in. I am taking account of the waterfall before that point.

Mr. Cathal Sheridan:

That will be sufficient to address the matter in many resolutions because of the European single resolution mechanism and the gradual mutualisation of the fund. It will really only be in a disastrous situation that the ESM will be involved. The purpose of the single resolution mechanism is to ensure there will be sufficient funds in the single resolution fund in most cases to cater for resolutions without the State having to intervene.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I would like to ask about the waterfall. The uninsured depositors - those with more than €100,000 in their bank accounts - will also take a hit at an earlier stage, before the ESM moves in.

Mr. Cathal Sheridan:

There is depositor preference in the context of the bank recovery and resolution directive. All other senior debt will be bailed in first before deposits of more than €100,000 are reached. The directive and the single resolution mechanism also make provision for the exclusion of these eligible deposits for contagion or financial stability reasons. It is obvious that other liabilities would then have to pay on their behalf. There is scope for these deposits to be excluded, depending on the circumstances of the particular resolution and its implications for the broader economy, domestically and internationally.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I would like to comment on a big concern at this stage. My understanding is that if we do not pass this legislation, it cannot take effect in Europe. They need this member state to agree to it. We would be agreeing to something without substantive progress having been made on the issue of retroactive recapitalisation. The wording in the guideline is very similar to the wording in the draft a year previously. Will the officials provide for clarity for the committee in this regard? Is it the case that the application for direct retroactive recapitalisation would not require us to follow the cascade-waterfall model, which would mean that bond holders and depositors would have to take a hit, the State would have to inject up to a certain level and only then would the ESM invest? Is that the proposal? Is it the officials' understanding direct recapitalisation will follow this avenue? I ask them not to reply by saying this is to be decided by the board of governors at a later stage. Surely the Department has some feeling of how this measure will be applied, given that it is potentially one of the most beneficial measures to the State in respect of the quantum of money that would be resecured. Have we been given any understanding - perhaps from the other governors, the ESM or other member states - of how this will be applied? Is the committee to be kept in the dark?

Mr. Feargal Ó Brolcháin:

We have addressed this question. The Minister has addressed it on a number of occasions in the House in response to parliamentary questions. As we have outlined, Article 14 says what it says. That is where the matter rests.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I would like to read something to the officials. I am sure they are involved in drawing up answers to parliamentary questions on behalf of the Minister. I tabled a question to ask the Minister for Finance to explain how an application under the direct recapitalisation instrument of the ESM would calculate the amount that would have to be required at a time of recapitalisation by the State to bring Bank of Ireland and AIB up to the level of the common equity tier 1 ratio of 4.5% as established under the Basel III framework. If these banks were to go bust today, we would need to know this. That is how the instrument would take effect. I was told that the Minister had no official responsibility to Dáil Éireann in the matter. I ask the officials not to tell me that the Minister has answered these questions. This is a very serious issue. I have been told it is up to the board of governors. If we are being asked to accept legislation that will allow this instrument to take effect - we have a veto on this - surely we are entitled as Members of the Parliament to have an understanding direct recapitalisation will be facilitated in a way that will not have to go through the waterfall system. If it does have to go through that system, it will not be very beneficial to the State.

Mr. Feargal Ó Brolcháin:

I would like to provide some clarification in that regard. I draw a distinction between forward-looking and retrospective recapitalisation. The detail of forward-looking direct recapitalisation is fleshed out in the guideline.

The detail of retrospective recapitalisation is not fleshed out, which would be decided on a case-by-case basis as applications were made.

5:00 pm

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The CEO of AIB, Mr. David Duffy, is able to comment publicly on the fact that direct recapitalisation may be able to be availed of without going through the waterfall system. He is a banker and head of AIB and speaking to the media. The delegates are officials in the Department and I am sure they are some of the most knowledgeable on how we would apply for direct recapitalisation. The Minister has told the committee that he intends to apply some time after November. Surely, based on their understanding, they can inform other parliamentarians who have a responsibility in this matter whether Mr. Duffy is correct in his public utterances, or at least state there is a chance this is how the application or instrument could be applied.

Mr. Scott Rankin:

I am not familiar with the exact comments to which the Deputy referred. He is asking us to give him the details of a negotiation which has not yet taken place. We cannot do so. Rest assured, if there is a negotiation on retrospective recapitalisation, we will put our best foot forward. That is as much as we can say.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The Department of Finance is asking us to sign a blank cheque for it by ratifying it without the Department getting the deal over the line. It has had two years to secure the detail, but there has been no fleshing out whatsoever of the detail of retroactive recapitalisation. I hope and pray the Minister and the Department have a clear understanding behind closed doors of how this will happen and that they are aware an application can be made for direct recapitalisation without having to go through the waterfall process and that they are keeping us in the dark because they want to keep everything closed off from Opposition politicians.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I have another commitment at another meeting and Deputy Kieran O'Donnell will take the Chair.

Deputy Kieran O'Donnell took the Chair.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I thank the delegates for their explanation which has been very helpful. To follow on from where Deputy Pearse Doherty finished, the conditionality set out for accessing current recapitalisation suggests the threshold will be very high and that all other possibilities will have to be exhausted before one can access recapitalisation under the ESM and that an arguably even higher threshold will apply for retroactive recapitalisation, judging from the sounds coming from the European Union and the fact that it will be left to the discretion of the board of governors. A country must exhaust every other possibility before it will be able to apply for direct recapitalisation of its banks.

Mr. Feargal Ó Brolcháin:

As my colleague, Mr. Rankin, outlined, the Deputy is asking us to comment on a negotiation which has not yet taken place. I do not see what the Deputy has outlined as a very strong opening position in such a negotiation. I am sorry to be repetitive, but Article 14 sets out what it sets out and simply states the details of any particular application will be decided when the board of governors decides on it. That is as far as it goes. It allows the board of governors discretion to take the approach the Deputy has suggested or to take a different approach.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It does not give me much hope because the threshold is so high, even if one is looking for money in the here and now. Of €500 billion in lending capacity only €60 billion is available for direct recapitalisation of financial institutions. Is that correct?

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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That is a pretty small amount, which is just over 10% of its lending capacity. With such a small amount available throughout the whole of Europe for direct recapitalisation and a pretty high threshold being exacted for current recapitalisation in the legislation, our chances of getting retroactive recapitalisation are zero to nil, given the size of the pot available and the thresholds applied to current recapitalisation. There is nothing to give much hope we will get anything in terms of retroactive recapitalisation. Is this a reasonable reading of what we have in front of us? To put it another way and to use colloquial language, it does not state retroactive recapitalisation would be considered sympathetically for countries which have been beggared as a result of their requirement to bail out their banks and have had a really hard time - obviously, it would be phrased differently. It has very high thresholds for current recapitalisation and very little money available and something about a board of governors considering it on a case by case basis. It does not look very hopeful.

Mr. Feargal Ó Brolcháin:

I have outlined with the Minister has said, that an application will be considered after the instrument is put in place. With regard to the phrasing, these documents are always phrased like this and it is the standard way they are constructed. It is important to note a provision for retrospective recapitalisation is included, which leaves the possibility open. This can be considered an achievement in itself.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It is not for Mr. Ó Brolcháin to comment, but it looks like a sop to salvage the credibility of the Government's original triumphalism that it would obtain this, that as it now fades into the distance there is still a possibility we will get it. I will move on from this point as there is not much more to be said about it.

On a more general basis, the €60 billion for direct recapitalisation would be a pretty pathetic figure if there was to be another serious financial crisis in Europe. We had to get €64 billion and one bank alone, Anglo Irish Bank, required €30 billion. If there was to be any serious shock to the European financial system, the €60 billion for the whole of Europe would be exhausted very quickly by two banks the size of Anglo Irish Bank. We would then be back to our bailing them out again.

Mr. Scott Rankin:

The €60 billion set aside for direct bank recapitalisation is in the context of an ESM fully invested given its share capital, which Mr. Sheridan outlined. The fully invested amount was envisaged at €500 billion. The current investment amount is nowhere near that figure. This, taken in conjunction with the changes in bail in conditions, mean that we are not comparing like with like. Not only would a bail-in apply up to senior debt and beyond in the future, but banks would also have far higher levels of capital than our banks did. There would be capital levels of 15% to 20%. We are in the realm of speculation, but if a bank in Europe had a serious problem next year which was envisaged as being systemic in the European context and the ESM had not invested all of the money it could, there is nothing to say the €60 billion figure might change.

Presumably, though, it would require a decision by the board of governors to do so.

5:10 pm

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Is the €60 billion included in this legislation?

Mr. Scott Rankin:

Sixty billion euro is the amount envisaged in the context of the current capitalisation of the ESM-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Is that figure set out in this legislation?

Mr. Scott Rankin:

-----and the €500 billion maximum capacity.

Mr. Feargal Ó Brolcháin:

The legislation simply provides for the inclusion of the direct recapitalisation instrument, DRI, among the instruments that can be included in the ESM treaty. It provides a legislative basis for the Minister to agree to this instrument. The figure of €60 billion is the one agreed by the ESM board of governors as the cap on the DRI. There are a number of reasons for this. First, all such discussions are the subject of agreement among the now 18 member states. Second, the €60 billion has a greater than linear impact on the ESM's lending capacity. As such, greater provision must be made. If the ESM fully provided €60 billion by way of direct recapitalisation, the rest of its lending capacity would be reduced.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Allowing for more money to go directly into banks because giving it to governments would reduce-----

Mr. Feargal Ó Brolcháin:

It is because of the accounting treatment of equity investment as opposed to lending. Under the former, the ESM would need to make provision of greater than €60 billion.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Given the approach of just over 10% of the fund being available for direct recapitalisation, the thinking is that the states and the taxpayer will need to pick up the bill in the event of a serious crisis. Mr. Ó Brolcháin mentioned that the 10% figure might be varied, but this is indicative of the thinking involved.

Mr. Feargal Ó Brolcháin:

What I said was that it was open to the board of governors to review the cap if appropriate. The €60 billion amount should not be viewed in the context of the starting point of a crisis. As has been outlined, the BRRD measures are in place. As Mr. Rankin mentioned, capital has been provided for the banking system since-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I welcome the bail-in and so on, although it is gut-wrenching for us that Europe has now acknowledged the need for a bail-in of bondholders when we did not get one and are highly unlikely to do so. As a practical example of how all of this is working, will Mr. Ó Brolcháin tell us about the €45 billion that has been given to Spain and Cyprus? How did that process work, what conditions applied and so on?

Mr. Feargal Ó Brolcháin:

The lending to Spain was for what is called an indirect recapitalisation instrument, which is provided for in the treaty as it stands. Essentially, it was a loan to Spain to provide recapitalisation for its banks. In the case of Cyprus-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What of the interest rates?

Mr. Feargal Ó Brolcháin:

The interest is the standard ESM rate under the pricing guideline. There is a slightly higher margin for indirect recapitalisation, as that instrument is now being called. In the case of Cyprus, the lending was stability support similar to the support provided for Ireland. It was a straightforward ESM loan to assist it-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What conditionality applied?

Mr. Feargal Ó Brolcháin:

The conditionality is set out in a memorandum of understanding. Broad macroeconomic and other conditionalities apply. They are not the same as those applied to Ireland, but they are of the same nature in that they cover budgets, economic structural reform and financial sector reform. We can arrange to provide a copy of the memorandum of understanding, if the Deputy wishes.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I would be interested in it.

Mr. Feargal Ó Brolcháin:

Like our memorandum of understanding, it is updated after each review. We will provide the original one and the current update to the committee secretariat electronically. That is probably the best way to go. They are available on the ESM website anyway.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I thank Mr. Ó Brolcháin.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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I thank the officials for their time this evening. Is it still the ESM's intention to decouple banking from sovereign debt or has that changed since the July 2012 statement?

Mr. Feargal Ó Brolcháin:

I will apologise for being repetitive. The statement on breaking the link between the sovereign and banks comprised a number of factors, principal among them issues relating to the banking union element and the BRRD and the single resolution mechanism, which are two important building blocks. The aim is for the single resolution mechanism to be self-financed by the banks. Another factor was the need to provide for the DRI as a further back-stop. There are a number of stages, in a forward-looking sense, with these elements in place.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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I appreciate the comprehensive nature of Mr. Ó Brolcháin's answer and I understand it, but I am asking a different question. Has the stated intention of the Eurogroup - perhaps not of the ESM - changed? Has it publicly watered down that statement on decoupling banking from sovereign risk?

Mr. Feargal Ó Brolcháin:

I could not say that. There is no basis for doing so. The guideline needed to be drawn up within the ESM treaty.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Sure, but the stated strategy is to decouple the link.

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Herein lies my struggle. Other than the DRI, which is too small and will probably never be used, based on the technical note we have received, the ESM would decouple the link by lending directly to banks for recapitalisation so that the sovereign would play no part. Am I right in believing that, before such a recapitalisation, the ESM's money would come via the sovereign? By definition, this would maintain the sovereign-banking link through the sovereign lending on to the banks.

Deputy Liam Twomey resumed the Chair.

Mr. Feargal Ó Brolcháin:

Does the Deputy mean the direct recapitalisation?

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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No; I am talking about the remaining €440 billion or €450 billion.

Mr. Feargal Ó Brolcháin:

If the entire €60 billion is used up, the €440 billion will be lower because the ESM's borrowing capacity will be reduced by greater than €60 billion.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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By definition, the non-DRI mechanism, which is the main ESM mechanism, links sovereign and banking risk because the lending is via the sovereign. Will that not still be the case?

Mr. Scott Rankin:

To access the DRI, one must rule out the appropriateness of the other ESM instruments, one of which the Deputy has referenced.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Yes, but I want to ensure that I have not missed anything that has changed in the past two years. Is the main lending for the ESM still via the sovereign?

Mr. Feargal Ó Brolcháin:

Yes. The ESM was established to lend to member states.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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They can lend on to the banks.

Mr. Feargal Ó Brolcháin:

If that is what the assistance is required for, or if stability support is required where a country is unable, for whatever reason, to borrow on the markets.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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It can be used as a budgetary support.

Mr. Feargal Ó Brolcháin:

Yes. The main articles - Articles 14 to 18, inclusive - provide for precautionary lending, indirect banking recapitalisation, normal stability support loans and primary and secondary market purchases. These are the available instruments. It has been established not only to address banking issues but also sovereign problems.

5:20 pm

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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If we move on to the direct recapitalisation instrument, DRI, then, am I correct in thinking that it really is the only mechanism that decouples sovereign risk from banking?

Mr. Cathal Sheridan:

That is probably not the case. There is the bank recovery and resolution directive, BRRD, structure and the single resolution mechanism, SRM, structure into which we are entering. The purpose of the SRM is to set up a fund to which the banks contribute. When a bank goes into resolution, one goes through the waterfall - the cascade - and the bail-in mechanism, bailing in all the subordinated debt, junior debt and senior debt, and then one uses the resolution fund at a European level. In the first couple of years there will be a gradual mutualisation. In other words, it is compartmentalised for the first eight years. One goes to the Irish compartment first and if there is still a deficit one goes to the other compartments – the mutualised elements of the compartments. In the first year it is 40% mutualised and in the second year it is another 20%. By the end of year two one has 60% mutualisation. One has access to a great source of funding from the mutualised compartments of other member states, and that will gradually be mutualised fully after eight years. After eight years there is a proposal to develop a common back-stop for the single resolution fund itself.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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The technical note with which the committee was provided said that as we go through the cascade the creditor haircut - the first bail-in involving equity bondholders - is 8% of the losses, and that the national resolution fund for the SRM, which I guess that is all moving towards, is another 5% of the losses. Is that the case?

Mr. Cathal Sheridan:

In the case of a bail-in, if one wants to avail of the resolution fund one has to bail in a minimum of 8% of eligible liabilities and own funds in order to be able to move to the stage at which one can use the resolution fund.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Am I correct in thinking, if we take Anglo Irish Bank as an example - another Anglo - and its losses were €30 billion, that the first level, which is 8%, would be €240 million and that the next level in the cascade, which is the resolution fund, would be 5%, which would be €150 million? In the case of Anglo Irish Bank, which on a European scale is tiny – it is big by Irish standards – of the €30 billion loss, one still has €29.6 billion left by the time one gets to the ESM. The cascade does not even slow it down.

Mr. Cathal Sheridan:

Anglo Irish Bank is a particular bank. When the BRRD was being developed, the authorities would have looked at the level of losses for many of the other banks and the general view would have been that an 8% bail-in of liability and capital plus the 5% of the resolution fund would have covered the vast majority of banks that got into trouble.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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The technical note has a contradiction. It says it is 8% and 5% of the bank’s liabilities or losses. They are very different things. Is it liabilities or losses?

Mr. Cathal Sheridan:

It is liabilities on own funds.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Let us take Anglo Irish Bank. If a bank comes along and says it has a loss which needs to be filled of €30 billion, is it 8% and 5% of the €30 billion or is it 8% and 5% of the total liabilities?

Mr. Cathal Sheridan:

It is of the total liabilities.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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It is a much higher figure in that case. Is there a sense that the first two parts of the cascade will provide a 100% buffer in most cases?

Mr. Cathal Sheridan:

Yes; that would be the accepted view when looking at the extent and level of losses in banks throughout the financial crisis in recent years. That is why the BRRD was designed in that fashion. There was considerable debate about the level of the 8% figure and that was what member states agreed as an appropriate amount that would deal with the majority of cases.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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For absolute clarity, let us just stay with the example of Anglo Irish Bank. Let us say Anglo Irish Bank says it needs €30 billion. Fifteen percent of €30 billion would be €4.5 billion. If I understand Mr. Sheridan correctly, it is much more than €4.5 billion. Anglo’s total liabilities would be taken into account, which might be €300 billion, and therefore 15% of that is €45 billion, which is bigger than the €30 billion hole. Is that the way it is done?

Mr. Cathal Sheridan:

Yes; in that particular instance those figures would make sense. It is the liabilities plus the bank's own funds. That is the tier one capital, the additional tier one, the tier two, subordinated debt and then all the eligible liabilities.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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It is not just 8% and 5% of the loss.

Mr. Cathal Sheridan:

That is correct.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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That is critical. Could I ask about the €60 billion? I know we have been through it before. It feels very light. I have got very useful clarity on the 8% and 5%. Let us say they do not stop the problem and we have to move on to the ESM. The note we have says the DRI mechanism can only be used if indirect recapitalisation by the ESM is not possible. Is that correct?

Mr. Cathal Sheridan:

That is correct.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Once we get to the ESM, is it correct that the ESM starts with sovereign liability lending and only when that is not available does one get into the DRI, which is non-sovereign liability lending?

Mr. Feargal Ó Brolcháin:

As I outlined in my opening remarks, the purpose of it is for the specific case in which an ESM member experiences acute difficulties with the financial sector that cannot be remedied without endangering fiscal sustainability due to a severe risk of contagion, and if other alternatives would have the effect of endangering their market access. It is clearly identified as being an emergency if it is the case that the member state could avail of another ESM instrument without endangering its access to the markets. That would come first.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Am I correct in saying that would be rare? One would have to put together quite a specific case, because if I understand the system and what Mr. Ó Brolcháin said correctly, if we have been through the 8% and the 5% but more money is still required as that has not fixed the problem, and we are now onto the ESM, if we lend the sovereign money to lend on to the banks it might cause the country to collapse or lock the country out of the markets for some reason, and only in the case of a possible destabilisation of the sovereign can the DRI mechanism be turned on.

Mr. Feargal Ó Brolcháin:

That is essentially the case.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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That is a pretty high burden of use. I cannot think of any case in which lending to a country could cause such a scenario to unfold. Is there any case in the recent crisis in which that condition would have been satisfied?

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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In our case, but they will not give it to us retrospectively.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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No; it is the opposite case. In our case they said it was not that at all and that they would have to lend to the sovereign. Lending to the sovereign is not what destabilised us. One would have to argue that lending to the sovereign by the ESM would destabilise the sovereign, but in our case it was what stabilised it.

Mr. Scott Rankin:

We are speculating.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Yes we are, but I cannot think of a single scenario in which that could occur. This is a meeting about the DRI.

Mr. Feargal Ó Brolcháin:

One must look at it in a forward-looking context. We are looking at a scenario in which a country’s debt-to-GDP ratio is very high.

Mr. Antoine MacDonncha:

It is more the case that, rather than arguing that lending would destabilise the country, one would have to argue that it would not be sufficient to stabilise it.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Then one could use the DRI.

Mr. Antoine MacDonncha:

That is how I would interpret it.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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If one assumes that Ireland’s GDP is about one seventy-fifth of eurozone GDP - scaling it back to Ireland, where we understand the amount of money required - that would be about €650 million pro rata. The sum of €60 billion might sound like a lot of money, but when one brings it back to an economy that we can all understand, namely Ireland's, it would be about €660 million. It is a small amount of money. The IMF has expressed concern, as have various economic commentators. I understand Ireland is not about to go back to try to renegotiate the amount, but what is the Department’s view? Is it the case that the €60 billion is sufficient, or would the Department like to have seen a braver number?

Mr. Feargal Ó Brolcháin:

The sum of €60 billion is the number the Ministers agreed in June and, taking into account the other measures that are in place, that is what is available.

5:30 pm

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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I know that is what is available. That is not the question. It is an honest question. Can we not have the Department's view as to whether €60 billion is enough?

Mr. Scott Rankin:

If the Deputy could bear in mind that in the system it is used and money is drawn down. Ireland's capital is part of the ESM capital so it is our capital that is being invested in this bank in the future that is being recapitalised through ESM.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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I understand that. I am not trying to catch anybody out. If the witnesses are not in a position to answer that is fine and they should just say so. I would very much like to know the Department's view as to whether €60 billion is a number that it is satisfied with.

Mr. Scott Rankin:

We have to pick a number. In the context of paid-in capital and the maximum fire power that the entity will have, we have to pick a number that is appropriate for a particular use. As I said, we cannot predict what the next crisis will throw at us. Plainly if the tools as they have been designed are not appropriate to deal with the crisis, then there is always the option of modifying them. A sum of €60 billion was the number agreed upon that was appropriate in the context.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Let me just be clear. If it is not appropriate, if it is not due protocol for Mr. Rankin to answer the question, I fully accept that and have no issue with it at all. If it is the case that he has an opinion that he is allowed to share, I am just curious. The IMF has an opinion. It has stated that it is probably not enough and seems a bit low, that we do not know what is going to happen in the future but it seems low. Is the witness allowed to share his opinion? If not that is fine, I fully accept that.

Mr. Feargal Ó Brolcháin:

That is a question for the Minister.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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I am asking the departmental officials. I am happy to ask the Minister. If the witnesses from the Department cannot answer that is fine.

Mr. Scott Rankin:

Perhaps if we were sitting in Frankfurt and we know what the results of the comprehensive assessment were going to throw at Europe, then we might have a better view but we do not have that information. We are only familiar with our own banking sector so it is a very difficult question to answer.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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In terms of the €11.1 billion, we have put in approximately €1.6 billion - is that correct?

Mr. Feargal Ó Brolcháin:

We have put in €1.2 billion, two and a bit.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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And we are on call for about another €11 billion, is that right?

Mr. Feargal Ó Brolcháin:

Yes.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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Are we going to have to put that in? Could Mr. Ó Brolcháin just explain how we could ever end up writing a big cheque at the end of any given year?

Mr. Feargal Ó Brolcháin:

What would have to happen is that the ESM would have to provide loans for up to its capacity of €500 million. All of that would have to be used up. In other words the borrowers would not repay any of that money, ever. That €11.145 billion is our contribution to €700 million of total subscribed capital.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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So it is part of the extra two hundred buffer, is it?

Mr. Feargal Ó Brolcháin:

No it is part of the €700 billion. Annex II sets it all out. What would have to happen is the ESM would have to lend its total lending capacity or between its direct recapitalisation instrument, DRI, and its remaining vending capacity. It would have to lend the whole lot, none of that would be repaid and then that would be called in.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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It would be called in to repay the private lenders, is that right?

Mr. Feargal Ó Brolcháin:

That is right, yes. That is a remote possibility.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What are the voting rights on the board of the ESM? What are they based on for direct recapitalisation?

Mr. Feargal Ó Brolcháin:

Article 5(6) of the treaty provides that the decisions of substance are all decided by what is called mutual agreement.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Does that mean it has to be a unanimous decision?

Mr. Feargal Ó Brolcháin:

Yes, that is right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So any direct recapitalisation or direct retrospective recap would have to be by unanimous decision.

Mr. Feargal Ó Brolcháin:

Absolutely. All decisions relating to financial assistance or direct recapitalisation would be made by mutual agreement.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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If I may add a quick technical follow-up to Deputy O'Donnell's point. Is there a legal mechanism within the ESM and the DRI that would actually allow retrospective recapitalisation, critically not as a loan but as a transfer? That is what we are looking for, we are not looking for a loan.

Mr. Feargal Ó Brolcháin:

The direct recapitalisation in all cases will be an investment by the ESM, an equity investment.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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So legally, is it possible for direct recapitalisation to take place in this way under this DRI legislation?

Mr. Feargal Ó Brolcháin:

Is the Deputy asking if it would come as a grant?

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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No, an equity swap would be fine.

Mr. Feargal Ó Brolcháin:

That is what the instrument provides, an investment.

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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And there is no legal preclusion in the legislation for a retrospective one of them.

Mr. Feargal Ó Brolcháin:

No the guideline provides that the board of governors may decide a retrospective recapitalisation. Article 14 of the guideline provides for that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Have the procedures as such in that area still to be set down?

Mr. Feargal Ó Brolcháin:

Well that is one way of looking at it. It simply says that it will be decided on a case-by-case basis. I am being repetitive on that I am afraid.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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There is a reason for that.

Photo of Liam TwomeyLiam Twomey (Wexford, Fine Gael)
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I thank the officials from the Department of Finance for briefing the committee today. It has been a very worthwhile discussion.

The joint committee went into private session at 5.36 p.m and adjourned at 6 p.m. until 2 p.m. on Tuesday, 7 October 2014.