Mr. Patrick Casey:

The Special Resolution Unit, SRU, in the Central Bank carries out resolution-related activities in accordance with the Governor’s instructions covering credit unions, banks and investment firms. The unit is located in the Central Banking pillar of the Central Bank and for legal reasons it is operationally separate from the financial regulation area, which is responsible for the regulation and supervision of licensed firms. Given my resolution-related role, I hope to be able to address members' questions on the Credit Institutions Resolution Fund and, in particular, the three resolution cases which have been undertaken to date within the credit union sector.

As this committee is aware, the passing of the Central Bank and Credit Institutions (Resolution) Act 2011 by the Oireachtas placed Ireland’s domestic resolution regime on a statutory footing. The purposes of the Act include providing a resolution regime for the management of failed or failing credit institutions that is effective in protecting the Exchequer, ensuring the stability of the financial system and the economy, maintaining public confidence and protecting the interests of depositors. The Act specifies the powers of the Central Bank in resolution matters, powers which are exercisable by the Governor, subject to High Court approval.

The resolution fund was established under the Act and the Central Bank is responsible for the management and administration of the fund. The Central Bank and Credit Institutions (Resolution) Act expressly restricts the utilisation of resolution fund resources to: paying a financial incentive to a transferee under a High Court-approved transfer order; providing capital to a State-controlled bridge bank; and discharging any resolution-related costs incurred by the Central Bank itself.

Contributions to the resolution fund comprise fully refundable monies contributed by the Minister for Finance and non-refundable levies raised from the credit institutions industry under regulations issued by the Minister. On 23 December 2011 the Minister contributed €250 million to the resolution fund. The Minister has also made regulations to provide for the raising of levies from the credit institutions industry. To date there have been two levy periods with approximately €19 million collected during those periods, of which credit unions contributed approximately €14 million. The current balance in the resolution fund is €239 million.

In the context of the credit union sector, EU state aid approval for the use of fund resources is only available to support resolution action by means of a transfer order of all asset and liabilities of a failed or failing firm. When a transfer order is proposed as a means to address a firm’s difficulties, specific steps must be undertaken. In line with EU state aid principles, the Act requires the Central Bank to conduct a competitive bid process concerning the transferring assets and liabilities to ascertain market value. The Governor, on behalf of the Central Bank, must decide whether the intervention conditions under the Act have been met and whether a transfer order is necessary "in all of the circumstances”, representing a very high legal threshold requiring the exhaustion of all other available options. The Act also stipulates that an immediate winding up of the distressed firm must not be in the public interest, including that it is more cost effective to transfer the distressed firm than to liquidate it. The Minister for Finance must be formally consulted and must approve the provision of any financial incentive to a transferee under the Act. Finally, the High Court must approve a transfer order and must be satisfied that the detailed legal tests under the Act have been met in the circumstances of the case.

When the Central Bank undertakes a resolution action in accordance with the Central Bank and Credit Institutions (Resolution) Act, the resources of the resolution fund can only be used to fund any financial incentive under strictly prescribed circumstances. While the Central Bank is responsible for undertaking resolution action under the Act, the Minister for Finance must approve all financial incentive payments drawn on the fund and the High Court must grant the transfer order. While the Central Bank is also responsible for the management and administration of the resolution fund, the Minister for Finance retains the power to raise levies from industry to replenish the fund’s resources. It is also important to note that as a consequence of the three resolution cases undertaken in the credit union sector to date, further details on which are included in the appendix to this statement, no depositors have lost their savings.

Given the underlying sensitivities involved, I am precluded from discussing any specific cases that may or may not be with the SRU for resolution. I thank the committee for the opportunity to present details on the resolution fund and our resolution processes and am happy to answer any questions members may have in that regard.