Oireachtas Joint and Select Committees

Thursday, 9 March 2017

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Scrutiny of EU Legislative Proposals

9:45 am

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Before we proceed, I wish to record in public the decision taken by the joint committee on the scrutiny of EU proposal COM (2016) 856. COM (2016) 856 is a proposal for a regulation framework for the recovery and resolution of central counterparts and the committee agrees that it warrants further scrutiny. Details of committee decisions made in relation to EU proposals are published on the committee's website.

We will now engage in further scrutiny of EU legislative proposals COM (2016) 850, COM (2016) 851, COM (2016) 852, COM (2016) 853 and COM (2016) 854, which are financial sector regulations on risk reduction measures. We will continue our scrutiny of these EU proposals with the assistance of officials from the Department of Finance and the Central Bank of Ireland. I welcome Mr. Oliver Gilvarry, Mr. Timmy Hennessy, and Mr. Eoin Wickham from the Department of Finance, and Mr. Gerry Cross and Mr. Patrick Casey from the Central Bank of Ireland.

I advise witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to 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. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable.

I invite Mr. Oliver Gilvarry to make his opening statement and he will be followed by Mr. Gerry Cross.

Mr. Oliver Gilvarry:

I thank the Chairman, Deputies and Senators for inviting the Department here today to discuss with the committee the risk reduction proposals published by the European Commission last year.

This banking reform package aims to complete the reforms that the EU implemented in the wake of the financial crisis, which has made the financial system more stable and resilient. These proposals tackle the remaining weaknesses and implement some outstanding elements that are essential to ensure the institutions' resilience. These risk reduction measures will not only further strengthen the resilience of the European banking system and increase market confidence, but will also allow further progress in completing the banking union.

The Commission is proposing amendments to two key pieces of legislation: the , which provide for the single rule book that applies across the Union regarding prudential requirements for institutions and rules on governance and supervision of institutions; and the band the , which set the rules on the recovery and resolution of failing institutions and established the single resolution mechanism, respectively. The proposals aim to implement a number of international standards into EU law, while taking into account European specificities and avoiding undue impact on the financing of the real economy.

I will deal with the capital requirements regulation, CRR, and the capital requirements directive, CRD. The capital requirements directive IV sought to address a number of the lessons learned from the financial crisis in the years following 2008. These lessons included the fact that banks which appeared to be resilient were found to be poorly capitalised in terms of quality and quantity of capital. It was also evident that banks reliance on short-term liquidity had grown significantly in the period up to 2008, which resulted in financial institutions becoming heavily reliant on emergency liquidity provided by central banks as sources of short-term funding disappeared. Other issues such as inadequate group wide risk management and insufficient governance were also revealed during the crisis.

The capital requirements directive, CRD IV, and capital requirements regulation, CRR, included, among other things, requirements for banks to hold high quality capital as well as enhancing the supervisory powers available to the component authorities in order to assess and address banks' capital, business models, governance and risk profiles. While these reforms made the financial system more stable and resilient against many types of possible future shocks and crises, they did not comprehensively address all identified risks. In order, therefore, to complete the reform agenda, the EU Commission introduced the proposals we are discussing today.

The amendments to CRD IV and CRR which are introduced in these proposals for the most part follow internationally-agreed standards. These standards include a binding leverage ratio which seeks to prevent banks from excessively increasing debt, as well as the net stable funding ratio, which ensures that banks have stable long-term funding sources in order to prevent their vulnerability to liquidity issues.

Another area the proposals seek to refine is regarding the process that enables bank supervisors to impose additional capital requirements on financial institutions, often referred to as Pillar 2 requirements. The EU Commission is looking to bring consistency and clarity to the process as the current framework allows for different interpretations meaning that the level of additional bank capital being added varies across the Union. These proposals also introduce changes to the small and medium enterprise, SME, supporting factor which is intended to increase the provision of credit by banks to finance the real economy. This is achieved by making it more attractive for banks to lend money to SMEs. There are also proposed changes to help promote bank lending for infrastructure projects.

The other proposal from the Commission relates to recovery and resolution of financial institutions, BRRD. The EU bank recovery and resolution directive and the accompanying Single Resolution Mechanism regulation provides authorities with more comprehensive and effective arrangements to deal with failing banks at national level, as well as co-operation arrangements to tackle cross-border banking failures. Resolution occurs at the point when the authorities determine that a bank is failing or likely to fail, that there is no other private sector intervention that can restore the institution back to viability within a short timeframe and that normal insolvency proceedings would cause financial instability.

This particular proposal provides for a number of amendments to the BRRD. First, the EU framework requires banks to comply with the minimum requirement for eligible liabilities, MREL. This is achieved by the bank holding instruments that can be written down or bailed in if the bank is in difficultly and is placed into resolution. The bailing in of liabilities is intended to ensure that losses are absorbed by the creditors to the bank and in doing so recapitalises the bank, allowing it to operate normally post-resolution. The proposed amendment ensures that MREL complies with international standards in this area to prevent any unwarranted legal complexity and compliance costs due to a potentially parallel application of these rules. A further amendment to the BRRD seeks to harmonise the powers of resolution authorities to suspend the executions of bank commitments towards third parties, known as the moratorium tool, and also looks to expand this tool to supervisory authorities.

There is also a proposal for an EU harmonised approach on bank creditors' insolvency ranking. The harmonised approach would enable banks to issue debt in a new statutory category of unsecured debt available in all EU member states which would rank just below the most senior debt and other senior liabilities for the purposes of resolution. The introduction of clear, harmonised rules on the position of bondholders in the bank creditors' hierarchy in insolvency and resolution will facilitate the way bail-in of liabilities is applied by providing greater legal certainty and therefore reducing the risk of legal challenges.

Overall, the Department of Finance broadly supports the proposals and believes they will further strengthen the resilience of the banking system in Europe and increase confidence both in Ireland and the European Union in the system. We particularly welcome measures that aim to promote the financing of the real economy, both from an SME and an infrastructure perspective.

Before I conclude I would like to give the committee a brief update on the current position regarding banking union, to which these proposals are linked. In 2012, the European Council agreed on a roadmap for completing economic and monetary union, EMU, based on deeper integration and mutual support. Completing the banking union is an indispensable step to a full and deep economic and monetary union. The first pillar of the banking union consists of the single rulebook for the supervision of banks implemented by the Single Supervisory Mechanism within banking union. The second pillar consists of a common framework for bank resolution implemented by the single resolution board. These two pillars have been put in place.

The third pillar, a deposit insurance scheme, is currently under negotiation. The European deposit insurance scheme, EDIS, seeks to deepen economic and monetary union and to weaken the link between banks and their national sovereigns by means of risk-sharing among all the member states in the banking union. In the first stages of EDIS, re-insurance and co-insurance funding would be shared between the deposit insurance fund and the national participating deposit guarantee schemes. The share of funding provided by EDIS in case of a pay-out would progressively increase. In the final stages, EDIS would fully pay out in the event of a bank failure. As the third pillar of the banking union project, EDIS is an essential part of the guiding principle of weakening the link between banks and sovereign, particularly since it would ensure that savings are equally protected in all banking union member states.

I hope the brief outline I have provided on the Commission's proposal on banking union has been useful. We are happy to take any questions on these issues after the presentation from our colleagues from the Central Bank.

Mr. Gerry Cross:

I thank the Chairman and committee members for inviting us here today.

As the reform package being discussed maintains the principle of operational separateness between supervisory and resolution authorities the Central Bank, which houses both, is represented today by senior staff from both authorities. I am joined by my colleague, the head of resolution, Mr. Patrick Casey.

The Central Bank, like the Department, in general welcomes these proposals. The package will finalise important elements of the post-crisis financial reform package. It seeks to reduce risks in the financial sector and enhance market confidence to enable further progress towards banking union. The proposals also recognise the importance of bank funding to households and business in the EU and they include a focus on proportionality in respect of smaller, less complex firms.

A number of changes are also proposed to the bank resolution framework, as outlined by Mr. Gilvarry. As the IMF- among many others - noted last year, the framework has, together with the Single Resolution Mechanism, significantly strengthened the resolution regime in Ireland and the EU.

The Department of Finance has provided an overview of the Commission’s proposals and I do not propose to duplicate that.

In respect of the capital requirements regulation, CRR, and directive, CRD IV, we welcome the proposal to introduce the net stable funding ratio as a harmonised binding requirement at EU level to ensure that banks and systemic investment firms have sufficient stable funding to reflect the profile of their business. The leverage ratio is an important prudential back-stop measure, allowing risk-sensitive approaches to function while providing an appropriate baseline requirement. Work carried out by the European Banking Authority indicates that the impact of these measures will not be disproportionate.

As members will know, since the initial CRD IV and CRR package was finalised there has been the major change represented by the introduction of the Single Supervisory Mechanism, SSM, for the prudential supervision of credit institutions in the euro area. The SSM supervisory board, of which the Central Bank is a member, has been consulted on the Commission’s proposals for the purposes of an ECB opinion on the package, which is currently being drafted. The Central Bank, in its engagement on the proposals, seeks to ensure that they reflect appropriate levels of soundness and resilience, while reflecting the importance of adequate and sustainable sources of finance for households and business. In particular, the Central Bank is focused on several issues. Firstly, the proposal to extend the scope of the waiver from capital requirements so that it covers subsidiaries in different member states within the banking union. To the extent that Ireland hosts subsidiaries of banks which have their headquarters in other SSM jurisdictions, our concern relates to the fact that these entities may not be appropriately capitalised on a stand-alone basis if this waiver is adopted. Second, it is proposed to narrow the scope of Pillar 2 capital add-ons. We are very much opposed to this. We believe that supervisors need to retain the appropriate flexibility to adequately address emerging and evolving risks, as well as existing risks identified in the course of supervisory reviews. Third, it is also proposed that Pillar 2 could no longer be used to address macro-prudential or systemic concerns. While Pillar 2 should ideally be about additional capital or requirements for bank-specific risks, we think the proposed change may be premature given that the Commission has yet to publish proposals following its review of the macro-prudential framework. Fourth, while we support enhanced proportionality, including to reporting, the proposal to allow smaller institutions to report on an annual as opposed to a quarterly basis would in fact not be helpful. Regular reporting is the basis upon which a proportionate approach to supervision can be implemented. A more effective approach would be to reduce the amount of information requested, rather than the frequency.

As far as the resolution framework is concerned, the proposal includes the Financial Stability Board’s total loss absorbing capacity, TLAC, standard as a Pillar 1 requirement, but for the largest global systemically important banks only. Other institutions, including the Irish domestic banks, will be subject to a minimum requirement for own funds and eligible liabilities, MREL, the calibration and application of which has been revised in this package, as Mr. Gilvarry has explained. Many of the revisions should in general be welcomed as they provide additional clarity. However, we do have a number of reservations with the proposed calibration, including on the reduced flexibility in setting an appropriate level of MREL and the approach taken for the subordination of bail-inable liabilities.

Another key change to be introduced in this package is the partial harmonisation of the creditor hierarchy in insolvency and resolution. This proposal, which relies on contractual provisions, is clearly well intentioned.

However, an opportunity may be missed to introduce a fully harmonised statutory regime which could also provide safeguards and preference to all deposit holders.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Gabhaim buíochas leis na finnéithe fá choinne na gcuir i láthair ón Roinn agus ón mBanc Ceannais. Caithfidh mé a rá gur ábhar iontach casta é seo, ach rinne na cuir i láthair sainmhíniú ar chúpla cheann de na príomhcheisteanna. I thank the officials for their presentations on a highly complex area. It is interesting to hear from the Department and Central Bank of Ireland as their presentations differ, with the Central Bank taking a more cautious and, in some respects, critical approach, while the Department appears to be broadly supportive, to use Mr. Gilvarry's words, of the proposals. I would like to tease out some of the issues. Will the Central Bank witnesses elaborate on the bank's concern regarding the proposal to narrow the scope of Pillar 2 capital add-ons. Why is the Central Bank opposed to reducing the flexibility available to supervisors? Will the witnesses provide some examples to illustrate the reason for the Central Bank's concerns? Will the witnesses from the Department explain the reasons the Department does not share the Central Bank's concerns on this matter?

Mr. Oliver Gilvarry:

To clarify, the Department supports the Central Bank on the Pillar 2 requirements. We view this as the overall package. As I stated, there are issues, for example, the small and medium enterprise, SME, supporting factor allows for a capital weighting or less capital to be applied to SME loans above €1.5 million. Currently, under CRD IV, an exemption applies to loans of less than that amount. These are important issues in the overall package. We support the Central Bank on the Pillar 2 issue in respect of macro-prudential tools. As Mr. Cross outlined, the European Commission is carrying out a review but it has removed this flexibility from the directive and regulation. We are very much in support of the Central Bank in asking the Commission to show us what its framework looks like before it starts removing this flexibility.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I appreciate that clarification.

Mr. Gerry Cross:

To echo Mr. Gilvarry's comments, there is a large degree of convergence of view between the Central Bank and Department. The latter is in the lead on the negotiations and we provide our advice and views. It should be noted that this is a process and as the discussion proceeds, the perspective of the Central Bank is informed by the Department and vice versa and a convergence of view has taken place in many respects.

On the Deputy's specific question, Pillar 2 is in place to allow supervisors to complement the Pillar 1 capital requirements. Pillar 1 is basically where the directive sets out how to calculate the charge for credit risk, liquidity risk and operational risk. It sets out how to calculate the amount of capital a bank needs and this is fixed and non-discretionary. Pillar 1 provides that although Pillar 2 takes us a long way, it only takes us so far and we rely on supervisors being able to implement what is, in the post-crisis environment, a significant supervisory process in respect of firms and take the appropriate measures. This may mean stating that the bank in question requires more capital, as is often the case, needs to beef up its systems and controls in a certain respect or must change its personnel in certain areas. A whole range of things are needed. This is essential for the Central Bank. Speaking globally, one of the things that went wrong in the run-up to the crisis is that supervision had become etiolated as a force in terms of ensuring the soundness of the system.

Pillar 2, namely, the ability to apply supervisory judgment and require more, is very important. For this reason, the Central Bank is a little uncomfortable when we see a proposal which, while not fully undermining this ability, nonetheless seeks to constrain it. For example, whereas previously there was a fairly open list in terms of the powers we have and the measures we could take, the effort now is to make this a closed list of areas of engagement. For example, the catch-all power to require measures or capital where risks are underestimated by Pillar 1 is removed in the proposal. We are not comfortable with this narrowing of the way we can approach matters because things change, risks emerge and profiles are different.

In addition, a requirement in the proposal provides that banks make the initial determination as to what should be the composition of their Pillar 2 capital. In the view of the Central Bank, this is our decision to make, in other words, we should require that if there is a Pillar 2 charge, it should at least reflect the Pillar 1 composition.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Mr. Cross's reasoning makes sense as the proposals are alarming in this area.

Reference was made to the total loss absorbing capacity, TLAC, standard in Pillar 1. Do the witnesses support the idea proposed by the Bundesbank to gradually increase the TLAC ratio? Rather than developing this untested concept, would it not be a better approach to require additional capital for systemic banks as opposed to setting a TLAC level for these banks?

Mr. Patrick Casey:

I am not familiar with the Bundesbank opinion to which Deputy Doherty referred. There is, if one likes, a split between global systemically important banks in the regime being introduced under the proposals. For global systemically important banks, there is a Pillar 1 and Pillar 2 requirement akin to the capital regime. This means there is a minimum requirement for total loss absorbing capital and a Pillar 2 concept or an add-on equivalent to the concept in the capital regime.

To be clear, the supervisory authorities ascertain the capital requirements of an institution on a going concern basis. The concept of TLAC or MREL is something akin to twice that, which is the gone concern capital, so that if the firm fails in due course by virtue of the risks identified from the supervisors - if they were to come to pass - then all of the losses to emerge would be absorbed by the capital requirements. The gone concern capital, which sits on top of the regulatory capital, is usually in the form of debt and this element can then facilitate the recapitalisation of an institution to avoid taxpayer bailouts. That is the broad concept.

We would be supportive of a distinction being drawn in the package between the global systemically important banks and the other banks. The Deputy may ask why we support this distinction. Given that the larger banks operate on a multinational basis, they need to meet a standard amount of Pillar 1 requirement. This distinguishes them from other banks, for example, institutions in Ireland where we favour setting minimum requirements on an institution-specific basis, thus keeping the architecture that is currently on the Statute Book. This allows us to calibrate the level of minimum requirement for eligible liabilities on a basis that takes into account the specific risks of the institution. We favour the current regime in that regard as it provides flexibility. My argument, therefore, is similar to the argument made by Mr. Cross.

If I recall correctly, the Deputy's second question related to requiring a cap for systemic banks.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The question was whether it would be preferable to increase the requirement for additional capital for systemic banks as opposed to dealing with the TLAC proposal.

Mr. Patrick Casey:

We obviously do not have any globally systemic banks in Ireland. Rather than asking the institutions to meet their gone concern capital requirements through regulatory capital, as in equity type capital instruments, which are more expensive to fund, the concept through TLAC is that an institution can meet a gone concern element through a debt instrument that is available for loss absorbency at the point of failure but, in advance of failure, it can fund its balance sheet with a mix of capital and debt instruments and, in that way, it would be more efficient from a cost capital perspective.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I am conscious of the time and that we have to conclude shortly. I wish to ask two other questions. My understanding is that small institutions would be resolved under the ordinary insolvency procedure. Is that the case? If so, why is there a requirement on them to hold MREL instruments when there would never be a bail-in?

Mr. Patrick Casey:

As part of the resolution planning cycle, on an ex antebasis, we would look at each institution to see whether it provides, among other things, critical economic functions. If an institution provides critical economic functions, or those functions can be substituted by someone else in the market, then, in identifying our preferred strategy should the firm fail, we would typically identify that as a liquidation strategy. When it comes to setting an MREL requirement - a gone concern capital requirement for the business - our perspective would be that there would not be a need to have gone concern capital so the first half of the MREL stack with regulatory capital would still exist but there would be no need to set a gone concern element. Therefore, the institution would not have to hold an MREL requirement above its regulatory capital requirement. Does that make sense?

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It does. My last question is in regard to the leverage ratio. There is a consensus that the leverage ratio will be easily fulfilled by the institutions so it does not seem to be anything that will in any way challenge the financial institutions. Therefore, in the Central Bank's view, is it not warranted that there would be a higher leverage ratio than what is suggested?

Mr. Gerry Cross:

The question relates to the first question to Mr. Casey in terms of the balance between equity and bail-inable debt. All this is about trying to find the right balance. As the Deputy will be aware, the discussion around the leverage ratio has gone on for a number of years and among those discussions was the question of what is its purpose. For example, is it the primary thing and should we just focus in on the leverage ratio? The Americans would be closer to this position and they would say the leverage ratio is really the primary thing. In Europe, and this reflects a variety of factors, our view is that we do not want to lose risk sensitivity where we can safely retain it. In some areas, we are not as confident as we might be that having risk sensitive capital requirements will work, so there are changes taking place in that regard. However, where one can retain risk sensitivity, one should do so. That is why we have the standardised approach and the internal relations based approach, and so on.

At the same time, we know that using risk sensitivity, models and credit ratings has weaknesses, so it is important that one has something else. Therefore, the leverage ratio is designed as a backstop. It should not be biting unduly in terms of acting as the first line of defence but it should be there. If a firm has low levels of capital and that is being driven by the risk assessment of its assets, we need to be sure there is enough capital to support the overall size of the balance sheet. From our point of view, that has come out of the right place. It is a backstop and 3% is the right backstop, in our view, although discussion is going on about G-SIBs, global systemically important firms, and potentially about other systemically important firms. For now, we are comfortable that, as a backstop, it is the right thing. However, of course, it is combined with a whole range of other measures.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I have one final question.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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We are pressed for time.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The question would be helpful for the Department as well. With these proposals passing, can the Department guarantee there would be no requirement for a taxpayer bailout if any of our financial institutions, or a number of them, failed?

Mr. Oliver Gilvarry:

To take the framework we currently have, one has to look at the different steps. Given what has been brought in under CRD IV - the capital requirement directive IV - and some of the proposals here, some of which we do not agree with, as the Central Bank has outlined in regard to the macroprudential side and the limitations on the add-ons, we now have a framework whereby there is better quality capital and higher levels of capital. Even before we moved to that, however, there was a more intensive and more consistent engagement from the competent authorities with the entities in regard to looking at the business model to see what is the capital. Therefore, we have the higher level of capital and the better quality capital, and we then have the MREL concept which means that, if an entity is getting into difficulty, we start to bail in assets, which we did not see in our situation in 2008. We have the fund, which is one of the reasons the Department and the Minister have been very vocal in regard to the third pillar of banking union. We need to complete banking union so we do not have a situation where, if financial institutions get into difficulty, the link goes back to the Exchequer - to the sovereign. That is why it is so important to complete the work on EDIS but it is also quite important from a single resolution fund perspective that we have a common backstop and that we have full mutualisation as quickly as possible in order to eliminate any risk there is a call on the Exchequer in that event. Nonetheless, we have those other steps and those extra powers to ensure there is enough capital and enough instruments to be bailed in before we start moving towards the fund.

On the leverage ratio, I would agree with my colleagues from the Central Bank that the one thing that should be remembered is that the leverage ratio is there with the other instruments, so it is another indicator for the supervisor to decide there is an issue. We have the 3% for normal banks and potentially higher levels for the G-SIBs. From a European perspective, we have a very different model to the US. In particular, the US institutions do not hold the same level of mortgages on their balance sheets as we do because of what we call the Government-sponsored entitles, Fannie Mae and Freddie Mac. There is a much bigger securitisation market which is, in essence, state-sponsored and which we have in Europe. Therefore, the leverage ratio does not bite as much for them when compared to ourselves.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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The Department said it wanted to introduce amendments to two key areas, the capital requirement regulation, CRR, and the capital requirement directive, CRD, which were adopted in 2013 as potential requirements for institutions and rules on governance and supervision of the institutions operating in Europe. Since those were introduced in 2013, have any of the banks or financial institutions found it difficult to comply with them, even apart from the new changes that are proposed?

Mr. Oliver Gilvarry:

I will pass the question to my colleagues in the Central Bank. The rules that came in were well flagged. When we look at our domestic institutions, the framework is there, the Irish banks are running at a high level of capital and liquidity levels have improved significantly compared to where they were when we entered into the crisis and thereafter. Instruments are now being brought in under the review of this leverage ratio. Banks had to report the leverage ratio, although they did not have to comply with a level. I would need to check the numbers but, from my understanding, the domestic banks would all meet the 3% level and they would publish that on an annual basis. While I cannot speak from a supervisory perspective, from what we can see, the rules were well flagged and the Irish banks are in a good place for the requirements and actually meet well above the requirements on a capital perspective.

Mr. Gerry Cross:

I thank Senator Burke for his question. Obviously, the reforms introduced over the past eight to ten years have been significant and have completely transformed the regulatory and supervisory landscape, given that we saw what happened before.

That has been hard for Irish and other banks and it has placed demands on them. These demands are, nevertheless, very much the right demands.

I agree with Mr. Gilvarry on the current package. The key changes to the leverage ratio and the net stable funding requirement have been very well flagged. They are subject to an ongoing monitoring exercise by the European Banking Authority, involving reporting rather than setting requirements. There is a little bit of a way to go for some banks resident here but, on the whole, compliance will not be unduly challenging.

The package brings in transitional measures for the introduction of IFRS 9. The assessment of what its impact might be remains ongoing and banks are introducing systems for it but we know there will be some impact so the proposals allow four years so that the impact is smooth, which is very sensible. We fully support IFRS 9 as a very important measure but it is very helpful to allow a period of smoothing in order to avoid a cliff effect when it comes into force next year. Some aspects of the proposal will reduce requirements and there will be some alleviation for SMEs and in respect of infrastructure. We do not see a disproportionate impact in this package.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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A number of changes are also proposed to the bank resolution framework. As the IMF noted last year the framework has, together with the single resolution mechanism, significantly strengthened the resolution regime in Ireland and in the EU. We in Ireland paid a hefty price but is there an admission in the statement of Mr. Cross that, as well as Irish banks, the EU failed?

Mr. Gerry Cross:

The import of my statement was not to suggest that but that, before the crisis, there was not a global sophisticated framework to allow the resolution of banks which have critical functions in a way that minimised the risks and costs to taxpayers and member states. It was global problem, a European problem and an Irish problem. While the frameworks differ globally many of the same principles, driven by the FSB, are in place.

Mr. Patrick Casey:

During the crisis the banks had to be recapitalised using taxpayer resources and among the failings was the fact that national authorities did not have appropriate tools to impose losses on creditors. The banks did not have adequate loss-absorbing capacity and the purpose of the MREL and TLAC frameworks is to create loss absorbency so that, in the future, burden sharing can fall on shareholders and creditors rather than on the taxpayer. There was also an absence of a harmonised approach across the EU and different countries tackled the issue of bank failure in different ways. Over a period of time Ireland played its part in that, but other countries adopted different methods of dealing with essentially the same problem.

The bank recovery and resolution directive, BRRD, which was transposed in Ireland in July 2015, introduces a harmonised approach to recovery and resolution planning on an ex antebasis. Banks are now required to prepare recovery plans to ensure they have options to address a deterioration in their financial circumstances. The resolution authorities are required to prepare resolution plans that ensure an appropriate strategy is documented, showing how we have planned for failure and how this plan will be executed. It also has to be in a manner consistent with the public interest.

Supervisory authorities have been given early intervention powers so that if anything looks like it is going wrong it can step in and ask for recovery options to be implemented, such as the removal of management or a change of business strategy or operational structure. Resolution authorities have been given powers to bail in shareholders and creditors and to set up a bridge bank or an asset separation structure, as well as other powers. The framework is supplemented by the single resolution fund for the banks and larger institutions, some 30 of them in the banking union, as well as a national fund for investment firms.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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If we had a similar downturn in the future, the fact that all these safety valves are in place means a crash should not happen.

Mr. Patrick Casey:

The prudential framework has been strengthened to make failure less likely, such as better and higher quality capital requirements, more intrusive supervision complemented by the banking union, centralised supervision through Frankfurt and recovery planning. It is less likely that failure will occur but we need to be ready if it does arise.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Does the prospect of the euro, dollar or sterling being backed by gold come into the argument? The idea of backing a currency with gold has gone out of the window.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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We are under a time constraint so I ask the Senator to keep his questions to the proposals in front of us.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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It is an important question.

Mr. Gerry Cross:

The range of measures that has been taken since the crisis is very significant. The introduction of the SSM and the SRM and the fact that so much supervision of euro zone banks is carried out centrally is one of the most significant changes. It would be speculation to expand on that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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It is written in EU law that the European Banking Authority is based in London but there have been moves to relocate it. What is the progress on that? What would need to happen in EU law to move the authority from London?

Mr. Oliver Gilvarry:

The framework for the EBA is covered by the EBA regulation agreed by the co-legislators, by the Council and Parliament, and states that the authority should be based in London. Any change to that would have to go through the co-legislators. With the UK leaving the European Union, the authority will have to move and this will be part of the negotiations. The Department and the Government have made a public declaration of interest to locate the EBA in Ireland. It has between 160 and 180 people and has approximately 45,000 sq. ft. in London.

We would need something equivalent. We have had discussions with them at official level and the Minister of State, Deputy Dara Murphy, met the EBA a number of weeks ago. As such, we are continuing to push for the relocation of the EBA to Ireland, but it will be a co-legislator decision and part of the Brexit negotiations. There are four or five other member states which have made public declarations of interest in the EBA, including Poland and Spain. It will be part of the negotiations.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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What is the next stage after the public declaration of interest?

Mr. Oliver Gilvarry:

The next stage involves us engaging with Commission officials and the EBA. One of the important things on which we have focused has been the fact that the EBA is not just the authority and its building. There are 160 staff members for whom it will mean significant disruption. We have been engaging with the EBA to get a sense of its requirements which include schooling and transport links with other European capitals. For the authority, it is very important to have good transport links with Brussels and Frankfurt. It is about identifying these issues and highlighting to others in Europe that Ireland has strong transport links and that the education system, from primary to third level, is very good here. It is these soft issues that we are putting forward to say Dublin would be the least disruptive location for people to move to from London and where the EBA would have a greater chance of retaining key staff. The staff are very specialised and the more disruptive the move, the more likely it is the EBA will lose key staff. Ignoring the fact that we want to have the authority located in Ireland, the EBA has a very important role to play, especially in relation to these proposals. It has to develop the level 2 measures to put flesh on the bones of the directive and regulation for the CRR, the CRD and, to a degree, the BRRD. It is important for Europe as a whole that it have the least disruptive move.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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When is a decision expected to be made? Does Mr. Gilvarry have any idea of a timeline? Of course, it does not have to be located in Dublin. It could be located in County Mayo. There are flights into Knock airport also.

Mr. Oliver Gilvarry:

There is that.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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We need to get out of the mindset that it has to be located in Dublin.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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The points are valid, but they do not really relate to the legislative proposals at which we are looking today.

Photo of Rose Conway WalshRose Conway Walsh (Sinn Fein)
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They are valid in terms of EU authority.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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We are assessing the actual proposals made. We are very tight on time and need to go back into private session.

Mr. Oliver Gilvarry:

I can be quick. As a person from County Mayo, I take the Senator's point.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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We all know that County Mayo is wonderful.

Mr. Oliver Gilvarry:

While the United Kingdom is a member state of the European Union, the regulation stands and is applicable across all 28 member states. In theory, the decision could be made from a legal point of view on the night the EBA leaves. In reality, it is key to cause the least disruption for the authority to allow it to continue its work and retain key staff. It will have to be dealt with sooner rather than later, but I do not have a timeline. It is part of the negotiations.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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In its impact assessment the Commission estimated that the implementation of these standards or capital requirements could lead to an EU GDP reduction of between 0.3% and 0.7% but that it would have a potential upside in public moneys not being used in bailouts. Has the Department or the Central Bank conducted an analysis of what the figures might be for the Irish economy?

Mr. Oliver Gilvarry:

The Department looks at the proposals as a whole to see where we are getting the benefit. Where the Commission is conducting its analysis, it looks at the European Union as a whole. There are parts of this package which will not really have the full impact on our banking system because of the simple business model to which Irish banks work in terms of deposit taking and mortgages. Where we are trying to balance this is in trying to determine issues such as making it easier for infrastructural lending and SME loans greater than €1.5 million. It is to look at the overall package to see from the perspectives of Irish industry and the Irish economy what parts will work best for us. As a competent authority, it is a question of asking if the changes to the powers of a competent authority make sense and will ensure we will still have a strong and resilient framework.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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If there is the potential for a 0.3% to 0.7% fall EU-wide, do we have any understanding or feel for whether it will be lesser or greater here?

Mr. Oliver Gilvarry:

Coming back to the institutions we have here, we do not have GSIB entities, for example. As such, on balance, it should be smaller. However, we also have smaller SMEs. As such, it is a question of the entire SME supporting factor. We have need for a greater spend on infrastructure and it is about how that feeds through. We see an overall imbalance, whereby the impact would be less here, but it is difficult to determine from the impact assessments because the Commission makes them on a broad basis. It is hard to split them out to see what will happen to individual institutions.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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Does the Central Bank share the concerns expressed in the Swedish reasoned opinion about limiting pillar 2 requirements for the micro-economy? Sweden argues that a one-size-fits-all model is not appropriate and that local supervision should continue for the smaller economy? Are there thoughts on that issue?

Mr. Gerry Cross:

To revert to the Vice Chairman's earlier question, I have slightly different figures for the EBA and there is a slightly lower impact. It might be worth recording them. After that, I echo the comments of my colleague. We have not seen the report from the Swedish Parliament, but from what I hear, I think we are broadly aligned with its conclusions. Pillar 2 has been designed to address the risk pillar 1 does not get at and wider risks. Ideally, it should very much be a bank by bank assessment. However, macroprudential is an emerging art and key. As Mr. Casey said, the toolkit, albeit much better than it was, is still being developed. As such, it is too early to say we are sure we do not need pillar 2 for these purposes. It may be that in the future one will be able to say one has got it right and can use pillar 2 for micro and other things for macro, but we are not there yet. I think that is what the Swedish Parliament is stating.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I had a number of other points to make, but we are very tight on time and have to finish. We have to go back into private session and finish by 11 a.m. I thank the delegates for being here and assisting us, both in their opening remarks and interaction with members. We will consider our position on the proposals in private session. Is that agreed? Agreed.

The joint committee went into private session at 10.58 a.m. and adjourned at 11 a.m. until 10.30 a.m. on Tuesday, 21 March 2017.