Oireachtas Joint and Select Committees
Tuesday, 3 November 2015
Committee on Finance, Public Expenditure and Reform: Select Sub-Committee on Finance
Single Resolution Fund Motion: Discussion
I thank the Minister, Deputy Noonan, for attending today's meeting, which serves two purposes. Before we move on to Committee Stage of the Finance (Miscellaneous Provisions) Bill 2015, we must consider a motion that, like the aforementioned Bill, was referred to this committee by the Dáil on 22 October 2015. The motion agreed by the Dáil on that date states:
That the proposal that Dáil Éireann approves the terms of the Intergovernmental Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund as required under Article 29.5.2° of the Constitution, signed at Brussels on 21 May 2014, a copy which was laid before Dáil Éireann on 9 October 2015, be referred to the Select Sub-committee on Finance, in accordance with Standing Order 82A(3)(b) and (6)(a), which, not later than 10 November 2015, shall send a message to the Dáil in the manner prescribed in Standing Order 87, and Standing Order 86(2) shall accordingly apply.
I welcome the Minister for Finance and his officials to this meeting. I invite the Minister to make an opening statement.
I thank the Select Sub-Committee on Finance for inviting me before it to discuss the Dáil motion on the proposed ratification by Ireland of the intergovernmental agreement on the transfer and mutualisation of contributions to the Single Resolution Fund, which will enable the subsequent ratification of the intergovernmental agreement, IGA, to the Single Resolution Mechanism, SRM. This Dáil motion is a component part of the overall ratification process, with the other major element being the enabling legislation in Part 2 of the Finance (Miscellaneous Provisions) Bill 2015. This legislation, which we will discuss later, is short because the Attorney General indicated that the core points of function of the Minister and the power to spend are all that need to be dealt with in primary law. The remaining commitments in the agreement are binding on the State at state level only and do not, therefore, require domestic legislation to give effect to them.
The requirement for the motion arises from the same Attorney General advice which indicated that as the intergovernmental agreement constitutes an international agreement under Article 29.5.2 of the Constitution and, as it deals with funding and involves a charge on public funds - albeit that the contributions will be raised at national level in accordance with the bank recovery and resolution directive and the SRM regulation - Dáil approval is required. It is necessary, therefore, for the Minister for Finance to propose to move a Dáil motion accordingly.
As members are aware, there is a requirement for the member states to ratify the IGA before 30 November in order for the Single Resolution Mechanism to come into force by 1 January 2016. Some 90% of the aggregate of the weighted votes of all participating member states is required for this to happen. As members will appreciate, the SRM is a very important part of the banking union agenda and failure to meet this deadline would be a major embarrassment for the banking union project and could undermine its credibility. Consequently, I am seeking members' support for this Dáil motion.
The IGA was negotiated in order to enable the Single Resolution Fund, a key element of the Single Resolution Mechanism, to be operationalised. The Single Resolution Mechanism is the second pillar of the banking union and will ensure that if a bank subject to the Single Supervisory Mechanism, SSM, faces serious difficulties, its resolution will be managed efficiently with minimal costs to taxpayers and the real economy through a single resolution board and a Single Resolution Fund, financed by levies imposed on the banking sector. What this means in practice is that should any of our three major banks get into financial trouble, the decision about putting it into resolution will be made by the single resolution board rather than our domestic resolution authority. In addition, where bail-in of shareholders, capital instruments and eligible liabilities is insufficient to cover losses of the bank in question, then there will be access to funds from the Single Resolution Fund. This has the aim of breaking the link between banks and the sovereign and thus avoiding a repeat of the issues faced by countries during the recent financial crisis.
It should be noted that the target level for the Single Resolution Fund is at least 1% of the amount of covered deposits of all credit institutions authorised in all of the participating member states, which is to be reached at the end of eight years. This is estimated to be in the region of €55 billion. We estimate that the contribution of Irish banks to the Single Resolution Fund will be €1.8 billion over the eight years, which amounts to approximately €225 million a year. The banks' annual contributions will be calculated on the basis of their liabilities, excluding own funds and covered deposits, and adjusted for risk. The contributions paid will be a normal operating expense for banks, including State-owned banks. A transition period of eight years to full mutualisation or pooling of the Single Resolution Fund was negotiated. This requires that contributions from the banking sectors of the participating member states be paid into national compartments or accounts within the Single Resolution Fund during the period. This was facilitated by the IGA. This structure enables the progressive mutualisation or pooling of the fund by requiring that in the event of a call upon it, the national compartment of the affected member state pays first before, if necessary, the other compartments make a contribution. As the transition proceeds, a smaller percentage is taken from the affected national compartment and a greater percentage is taken from the other compartments, until after eight years when full mutualisation or pooling occurs. From that point, any funds required for the resolution of a bank or banks will come from the Single Resolution Fund as a whole.
In summary, therefore, the main purpose of the IGA is as follows: first, to transfer the contributions raised at national level in accordance with the bank resolution and recovery directive and the SRM regulation to the Single Resolution Fund; second, to allocate, during the eight-year transitional period, the contributions that are raised at national level to different compartments in the Single Resolution Fund corresponding to each participating member state; third, to facilitate the progressive mutualisation of these compartments in such a manner that they will cease to exist at the end of the transitional period; and, fourth, to prescribe how the Single Resolution Fund can be applied during the transition period.
It should be noted that the reason these changes could not be accommodated within the SRM regulation is that a number of member states argued that Article 114 of the Treaty on the Functioning of the European Union did not provide an appropriate legal basis to do so. Consequently, it was agreed that this issue should be dealt with through an intergovernmental agreement which could be formally ratified through national legislation.
As noted at the outset, the passing of this Dáil motion is an essential part of the ratification process for the IGA and I would appreciate the members' support for the Dáil motion that I have submitted for their consideration. I am happy to take any questions or provide any clarifications to assist the committee in regard to this matter, including any questions on the related legislative provision in Part 2 of the Finance (Miscellaneous Provisions) Bill 2015, if members think it appropriate.
I thank the Minister for his remarks on this motion and I wish to state for the record that Fianna Fáil will be supporting it. We are supportive overall of the banking union and we want to see the Single Resolution Mechanism come into force in January of next year. On the size of the resolution fund, which is estimated to be in the region of €55 billion, I made the point previously that, on the face of it, it appears to be very small given that the cost of the Irish banking bailout alone was in excess of that. I recognise that the fund will only be accessed after the various bail-ins have been executed. That is a new provision, and it is to be welcomed, which is being provided for on a pan-European basis.
I have one question for the Minister. Will he clarify the position regarding the Irish contribution? I take it that it will be made by three banks contributing €1.8 billion over the eight-year period, which is approximately €225 million a year. Presumably, that is AIB, Bank of Ireland and Ulster Bank or Permanent TSB.
Deputy Michael McGrath spoke about the three banks. What happens to any other financial institution that is not contributing to this fund? Where do they lie in terms of access to the fund in the future if they get into trouble?
The position seems to be that the international banks, wherever they are based, will also be paying into the fund. If they have branches here, these will be covered by the fund. The smaller institutions, which are regulated domestically, are also covered within the ambit of the fund.
Yes. There was an agreement on that. A certain number of banks in each jurisdiction would fall within the regulatory process of Frankfurt for banking union purposes. They were the three banks we nominated in Ireland then.
Yes, I understand that. Let us say we have ten banks instead of three. The Minister has mentioned the two pillar banks and Permanent TSB. If we imagine we have ten banks, would all of them have access to the fund and contribute to it? When this was originally announced, it numbered two or three larger banks across member states. How does that work?
I will seek clarification. I do not wish to mislead the Deputy in any way. All banks will be covered. Within the Single Supervisory Mechanism, SSM, the three banks we have nominated are certainly covered but any other bank would be covered as well within the fund.
Let us take Ulster Bank, for example, which has announced it is splitting its businesses from being an all-Ireland institution which reports to Britain to reporting on a Twenty-six Counties and Six Counties basis. Just to tease this out, let us hypothesise that the bank would take another leap, with the southern business being regulated under the Central Bank. Where would Ulster Bank be then? Would the bank automatically have to contribute to the fund, meaning there would be four banks instead of three? Is that an automatic process or would the bank have to make an application? Would the Minister have to sign an order or write to the European Central Bank about this? How does it work? Is it automatic?
My understanding is the bank would be automatically provisioned for under the terms of the fund and the regulations appended to the fund. Whether the bank would be a contributor depends on its asset base. In the Deputy's example, the bank would automatically become a contributor if it changed the manner in which it was regulated in an Irish jurisdiction. If the bank separated completely from operations in Northern Ireland and the parent bank in Scotland, it seems it would still be sufficiently large to get caught within the regulation.
I will speak about the smaller banks. There are a number of a small financial institutions that are trying to break into the market, so if one of them does so and starts taking deposits, issuing loans and so forth, will it contribute to the fund? Some of them are already operating here.
I thank everybody for their contribution. Deputy Michael McGrath referred to an issue that has been mentioned before, that the resolution fund is quite small in comparison with the possible liabilities across Europe. The primary policy position is that there will be no more bailouts by taxpayers but rather bail-ins of bank assets. In terms of a cascade of interventions, by the time we get to the resolution fund being involved, we will have gone through shareholders, junior bondholders, several categories of senior bondholders, corporate depositors and probably personal depositors in excess of €100,000. The resolution fund only kicks in after we have gone far down a cascade of assets that can be bailed in. In that context, it is reasonably significant. This was debated very hotly when it was introduced in the first instance. I am inclined to agree with Deputy McGrath. It not only looks small, it is small, and I am open to increasing it in future.