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.