Áine Brady (Kildare North, Fianna Fail)

I thank the Senator for raising this matter on the Adjournment, to which I am pleased to respond on behalf the Minister for Finance.

Liquidity management is an essential requirement to ensure the proper functioning of credit institutions in order that they can meet their various obligations in a timely fashion as they fall due, while continuing to fund their day-to-day operations. In this way, depositors and other creditors of individual institutions can be assured that a credit institution's commitments to them can be met. Robust liquidity management within individual institutions is also essential in order to maintain stability in the financial system as a whole.

The supervision of liquidity requirements for credit institutions licensed and operating in Ireland is primarily a matter for the Central Bank and the Financial Regulator within the legislative and policy framework laid down by the Minister for Finance in the context of their overall responsibility, respectively, for financial stability and the prudential supervision of credit institutions. The Minister for Finance has no role in the oversight of the liquidity of individual credit institutions. If the Senator is in possession of any information to suggest a credit institution has breached its liquidity requirements, I invite him to bring the matter to the direct attention of the Financial Regulator, if he has not already done so.

The Financial Regulator imposes quantitative and qualitative standards for liquidity for all credit institutions that it supervises, be they credit institutions operating in the domestic market or those operating in international markets. These standards are outlined in the Financial Regulator's document, Requirements for the Management of Liquidity Risk, and have been formally imposed as a condition on the licence of all credit institutions. The Financial Regulator also has a role in monitoring the functioning of liquidity within branches of credit institutions operating in Ireland where these are supervised by their home country regulator. The Financial Regulator maintains close communication with the regulators of other member states for this purpose.

Credit institutions are obliged to report weekly to the Financial Regulator on their liquidity requirements. All credit institutions are also obliged to be in compliance with the requirements on an ongoing basis. Breaches of liquidity requirements may be subject to proceedings under the Financial Regulator's administrative sanctions procedure or to prosecution.

It is important to note that while the Financial Regulator monitors compliance with its liquidity requirements, each credit institution also has a direct obligation to put in place the necessary structures and controls to ensure the Financial Regulator's requirements are met. In particular, the board of each credit institution is responsible for developing a strategy for the ongoing management of liquidity risk and for establishing a management structure to enable the institution to identify, measure, monitor, control and report on liquidity risk. Any breach of the quantitative liquidity requirements must be notified to the Financial Regulator immediately.

The importance of good liquidity management to the soundness of individual institutions and the financial system as a whole has been made abundantly clear from events throughout the recent financial crisis. The crisis clearly highlighted that, without good liquidity management principles and practices, financial institutions would quickly find themselves under stress and unable to meet their obligations. Internationally, the ample supply of liquidity in the years preceding the onset of the financial crisis in 2007 left many credit institutions unprepared for the shocks that occurred and many credit institutions struggled to maintain adequate liquidity throughout the financial crisis. For this reason, the European Central Bank and other central banks have been providing extraordinary liquidity support for financial institutions throughout the eurozone during the current financial crisis. These measures were introduced at the discretion of the ECB to deal with the liquidity crisis affecting the European-wide banking system. Irish credit institutions and many European credit institutions have obtained liquidity support provided by the bank. However, dependence on ECB lending has been significantly reduced, indicating that conditions in international financial markets have improved substantially and Irish credit institutions have benefited from improved funding conditions which has been reflected in reduced recourse by Irish banks to Eurosystem funding. The ECB has indicated publicly that it is engaging in the progressive, timely and gradual phasing out of the non-conventional measures which were introduced in response to the financial crisis but that, notwithstanding this, liquidity support will remain for months to come. As such, there are no negative implications in the medium term from the announced "phasing out" measures.

Arising from the lessons of the financial crisis, the Basel Committee on Banking Supervision has recently issued proposals for international minimum quantitative liquidity requirements to enhance banks' approach to the management of their liquidity requirements and build up their resilience to future shocks. These standards will in due course be implemented in Ireland through EU legislation. The proper management of liquidity, in line with the requirements of the Financial Regulator, is, in the first instance, the responsibility of credit institutions and their boards. Credit Institutions are expected to meet these requirements on an ongoing basis and any breach should be immediately brought to the attention of the Financial Regulator.