Brian Hayes (Dublin South West, Fine Gael)

This Bill is essential not only for sound financial stability reasons but also for our future general economic well-being. It is vital that our national banking authorities have the most comprehensive and effective tool-kit available to them to preserve and protect individual financial institutions and the financial system as a whole. The Bill is designed to provide these important tools in order to ensure the future protection of our financial system, depositors and taxpayers.

The programme for Government recognises the importance of having this type of legislation in place, with a commitment to introduce a comprehensive special resolution regime, SRR, for dealing with bank insolvencies and a bank levy. The Bill provides a basis for achieving these important commitments in the programme for Government in order to ensure that the financial industry contributes to the cost of any resolution measures in the future.

This Bill differs from the Credit Institutions (Stabilisation) Act 2010 enacted by the Oireachtas in December of last year. That Act was focused particularly on providing for the reorganisation and restructuring of the domestic banking system in line with the EU-IMF programme of support for Ireland. It conferred powers on the Minister for Finance, after consulting the Governor of the Central Bank, to seek court orders to issue directions to banks, restructure them, reorganise their assets and-or liabilities and ensure they are in a position to generate capital.

The Credit Institutions (Stabilisation) Act was introduced as emergency legislation and will cease to have effect on 31 December 2012, or at a later date substituted by resolution of both Houses of the Oireachtas. It is necessary, therefore, to have a more permanent statutory framework in place to address credit institution resolution requirements that may arise at any time in the future. Part 1 of the Bill deals with certain preliminary items. For example, section 2 sets out the definition of various terms used and section 4 sets out the purposes of the Bill.

Part 2 addresses matters relating to the exercise of the resolution powers provided for in the Bill. Section 9 sets out the conditions that must be met before an intervention under the Bill can be made in respect of an authorised credit institution.

Part 3 provides for the establishment of a fund, to be known as the credit institutions resolution fund, to finance the cost of the resolution tools provided for in the Bill including providing capital for a bridge bank and reimbursing the Minister for any financial incentives provided for the transfer of assets and liabilities. Section 12 provides that the Minister may contribute to the fund such sums as he considers appropriate from the Central Fund. This provision is necessary to ensure that the fund can access funds quickly if it needs to. However, the Minister is entitled to be reimbursed from the fund for all such contributions. Section 13 provides that all authorised credit institutions will contribute to the fund in accordance with regulations made under section 15. The Minister may, by regulations, also provide for the administration and operation of the fund.

Part 4 provides for the establishment of bridge banks to be considered in the context of a potential transfer of assets and-or liabilities from a credit institution experiencing difficulties. Section 17 provides that the Central Bank may establish a bridge bank to act as a temporary transferee where it may not be possible to find a private party willing to become a transferee immediately but where it is likely that a willing transferee will emerge within a reasonable period. Any capital requirements for the bridge bank will be met from the resolution fund, subject to written ministerial consent. Section 18 provides that a bridge bank will be taken to hold a banking licence and may carry on banking business.

Part 5 provides the Central Bank with the power, subject to meeting the prescribed circumstances, to transfer the assets and liabilities of a relevant institution to a third party. This may include, if necessary, transferring the assets and liabilities to a bridge bank provided for in this Bill. Section 21 sets out the conditions under which the Central Bank can make a proposed transfer order in respect of an authorised credit institution. Sections 22 to 24, inclusive, provide the Central Bank with powers to impose requirements on authorised credit institutions in order to facilitate the making of more effective and efficient transfer orders, provide that directors will have a duty to comply with such requirements, and permit the bank to disclose to potential transferees information acquired on foot of a requirement, as well as information provided voluntarily by the authorised credit institution. Section 28 provides that the consideration for assets and liabilities transferred under a transfer order should correspond to their market value and sets out the process for determination of that market value. Sections 29 and 30 set out the contents of a proposed transfer order, and the procedures to be followed by the Central Bank in applying to the court for a transfer order. Sections 31 to 34, inclusive, set out the publication procedures and arrangements for varying or setting aside the court order. Sections 35 to 44, inclusive, provide for a limited compensation regime for creditors of a transferor, in line with emerging international best practice, and provide for the appointment of an assessor who will determine the fair and reasonable amount of compensation, if any, payable, and provide for related matters. Section 46 provides that the Minister may, at the request of the Central Bank, provide a financial incentive to any person, including a bridge bank, to become a transferee. Section 48 sets out the process for determination of market value of assets and liabilities to be transferred under a transfer order. Sections 49 and 50 give clarification as to the effect of a transfer order. Section 51 makes specific provision for the transfer of foreign assets and liabilities under a transfer order.

Part 6 provides the Central Bank with the power, subject to meeting certain preconditions, to appoint a special manager to an authorised credit institution or its subsidiary or holding company. The purpose of the special manager will be to manage the business of the institution having regard to any recovery and resolution plans or to wind down the institution with a view to liquidation. Section 55 sets out the preconditions which must be met. Sections 58 and 59 set out the procedures which must be followed by the Central Bank in applying to the court for a special management order and in publishing the order.

Sections 60 and 61 set out the arrangements for varying or setting aside the court order. Sections 63 and 64 deal with the terms of the appointment and remuneration of a special manager. Section 67 sets out the functions of special managers and provides that the special manager shall take over the management of the business. Section 69 sets out the effect of the appointment of a special manager. Section 74 provides for the circumstances in which the special management of an authorised credit institution terminates.

Part 7 provides for a modified liquidation procedure which requires a liquidator to prioritise eligible depositors' access to their deposits over the usual objective of ensuring the best return to all creditors. The insured depositors may be paid by the deposit protection scheme, or their deposits may be transferred to another institution. Sections 77 and 78 set out the grounds on which the Central Bank may present a petition to the court for the wind-up of a credit institution, and the Central Bank's role in the wind-up of a credit institution where the Central Bank is not the petitioner. Section 80 sets out the two objectives of a liquidator in the winding up of an authorised credit institution. The first objective is to facilitate the Central Bank in ensuring that each eligible depositor receives the prescribed amount payable from the deposit guarantee scheme. In the event of a conflict this objective takes precedence over the second objective, which is to achieve the best results for the institution's creditors as a whole.

Section 81 provides that the Central Bank may facilitate the transfer of accounts of eligible depositors by making money available from the deposit protection account in pursuance of objective 1. Sections 83 to 87 provide for the establishment of a liquidation committee composed of two persons nominated by the Central Bank and one person nominated by the Minister, the purpose of which is to monitor the liquidator's process in achieving this prioritised objective, namely the efficient payment of eligible depositors the sums due to them under the deposit guarantee scheme. Once that objective has been achieved, the liquidation committee can be stood down because the Central Bank's key concern in supervising the winding up will have been satisfied.

Part 8 provides for the preparation of recovery and resolution plans, which allow the Central Bank and authorised credit institutions to identify possible actions that could be taken where an institution is experiencing difficulties. Such plans are prepared in advance of any difficulties and facilitate contingency planning by both the institution and the Central Bank. Sections 91 and 92 provide that the Central Bank may direct an institution to prepare a recovery plan setting out actions that could be taken to facilitate its survival and recovery in a situation where the institution might be experiencing financial instability, and submit the plan to the Central Bank for assessment, and that the Central Bank may direct the institution to implement such a plan where it believes it to be necessary. Section 93 provides that the Central Bank may prepare a resolution plan for authorised credit institutions which have been directed to prepare a recovery plan. This resolution plan will set out the Central Bank's contingency preparations for the exercise of the Central Bank's functions under this Bill in relation to that credit institution.

Part 9 of the Bill contains a number of miscellaneous provisions necessary to ensure that the powers provided under the Bill are effective. Section 95 is a significant provision as it is necessary to ensure that the reorganisation and restructuring measures provided for in the Bill can be recognised in other EU member states through the mechanisms available in the Credit Institutions Winding Up Directive, CIWUD Directive, on the reorganisation and winding up of credit institutions. This directive provides that the authorities in the home member state alone are empowered to decide on the implementation of reorganisation or winding up proceedings of an authorised credit institution in accordance with its own laws and that such decisions will be effective in all the other EU member states. This is particularly important given that many agreements, including debt agreements, entered into by Irish credit institutions are governed by laws of other EU member states.

Sections 97 and 99 provide for confidentiality provisions in the operation of the Bill if these are considered necessary in particular instances for stability reasons. Section 100 deals with agreements to which an authorised credit institution, any of its subsidiaries, its holding company and any sister company, is party or in which they have an interest. Agreements may provide for their termination or other consequences in certain circumstances. This section provides that none of the specified consequences will arise by virtue of certain actions, including, among others, the enactment of the Bill, the publication of the Bill, the making of any statement by the Minister, the Central Bank or an authorised credit institution in regard to the Bill and the use of any powers under the Bill.

Sections 102 and 103 provide for the limitation of judicial review and of certain rights of appeal to the Supreme Court. Sections 106 to 108 provide that the Central Bank may issue a code of practice relating to the operation of the Bill or guidelines on the exercise of its functions under it and also that the Minister may specify a relationship framework to govern his relationship with the Central Bank.

The Minister for Finance brought forward a number of amendments to the Bill during its passage through the Dáil to enhance its provisions in the light of further deliberations since its publication, including discussion with the EU and IMF authorities and in the Dáil. These involved amendments to the Bill itself, amendments to the Credit Institutions (Stabilisation) Act 2010, referred to as the "CIS Act", and amendments to credit union legislation. A significant number of the amendments to the Bill and those to the CIS Act mirror each other and are designed to ensure that our resolution mechanisms are robust and usable. Specific amendments were made to revise the provisions enabling burden sharing with the subordinated bondholders in the banks and to deal with the resolution of credit unions.

Although the tight timetable for Committee Stage amendments does not always allow for prior consultation, it was possible to take on board certain concerns raised by credit unions through Report Stage amendments. The point was made by the Minister for Finance when he spoke on Committee Stage that there was a fair degree of consultation between the credit unions and the Minister before he tabled the amendments on Report Stage. That is an important point. There was a fair degree of consultation on the issues that were brought to the attention of the Minister and the Department of Finance by the credit union movement.

I will outline some of the main issues addressed in amendments made to the Bill as published. In line with discussions around emerging international best practice in the context of a transfer of a bank's assets, a number of the amendments provide for a limited compensation regime for creditors of a transferor. These amendments allow the High Court, on application by a creditor, to permit the creditor to apply for compensation where the court has been satisfied that the amount received by the creditor on the winding up was less than it was likely to have been had the transfer order not been made, or that the creditor's burden in receiving less was, relative to the benefit to the financial stability of the transferor, the financial system or the economy, disproportionate having regard to the creditor's circumstances. The amendments provide for the appointment of an assessor to determine the fair and reasonable amount of compensation, if any, payable to such a creditor and to provide for consequent matters.

Discussions with the Troika highlighted the value of an expanded reference to transfers being at market value, of providing for the meaning of market value and of engaging in a competitive process where practicable. Accordingly, a new section was added to Part 5 setting out the process for determination of market value of assets and liabilities to be transferred under a transfer order. Accordingly, a new section was added to Part 5 of the Bill setting out the process for determination of market value of assets and liabilities to be transferred under a transfer order. It is also provided that the procedure to be followed if the transferor disputes the consideration for assets and liabilities as set out in the Bill as published is amended.

The Bill now includes additional powers for the Central Bank to facilitate the making of more effective and efficient transfer orders. Practical experiences with transfers of assets and liabilities under the CIS Act indicated that there was a body of work that must take place in advance of the transfer order, including engaging with potential transferees, preparing a data room and other information. There may be particular difficulties in ensuring an institution undertakes this work, including directors' duties and confidentiality constraints. Accordingly, a number of amendments to Part 5 of the Bill give the Central Bank a power to direct an institution to take certain actions that are necessary for the sales process to get under way and make consequent amendments to address the issues around confidentiality and fiduciary duties.

The changes made in the Bill to the CIS Act were developed following the Department's experience in applying for direction orders, transfer orders and subordinated liabilities orders under the CIS Act. While the CIS Act will cease to have effect on 31 December 2012, or a later date substituted by resolution of both Houses of the Oireachtas if that is practicable, a number of important applications may yet brought under that Act in the coming months.

In regard to other future subordinated liabilities orders, amendments made permit the Minister for Finance to rely on systemic and financial stability issues in making a proposed subordinated liabilities order rather than just the preservation or restoration of the financial position of a relevant institution. This amendment makes these provisions consistent with the provisions governing the other orders that can be sought under the CIS Act. Also, the range of matters that the Minister may have regard to when considering making a proposed subordinated liabilities order have been extended to ensure that the Minister takes into account additional market based issues when considering whether to seek a subordinated liabilities order.

In regard to credit unions, the Bill amends the Credit Union Act 1997 to enhance the Central Bank's ability to issue regulatory directions to cover a number of matters which are likely to be relevant in a resolution context, for example, where a credit union is unable to meets its obligations to its members. These could include a direction on maintaining capital or reserves; provisioning policies; the strengthening of systems and controls; the reduction of risks; and requirements regarding regulatory compliance. These provisions were amended on Report Stage on foot of consultations with credit union interests to address the genuine concerns raised. The resulting text meets the financial stability needs of the Central Bank while providing for a balanced and proportionate approach from a credit union perspective.

The Bill has also amended sections 97 and 129 of the Credit Union Act to provide for the automatic extension of the rules of the transferee credit union so that its common bond covers that of the transferor credit union and related matters.

Ireland is not alone in moving to introduce legislation to deal with failing financial institutions. A number of countries, for example, the UK, Denmark and Germany, have had to take steps to enhance the national and international frameworks for resolving financial institutions in difficulty. The EU and the G20 are now paying close attention to this area and the European Commission is expected to publish a proposal for an EU-wide crisis management framework later this year. It is important that Ireland now has a permanent resolution framework to deal with future problems that may arise in credit institutions and that it will never again allow the financial burden for resolving banks to be disproportionately placed on the taxpayer. The Bill provides such a permanent special resolution regime for this State that will allow the Central Bank to deal in an effective manner with credit institutions that are failing or likely to fail in the future. It also provides that this will be done in a way that provides maximum protection for the Exchequer and confidence in the financial system as a whole. I, therefore, commend the Bill to the House.