Brian Hayes (Dublin South West, Fine Gael) | Oireachtas source

I thank the Cathaoirleach for the opportunity to come before the House to debate this motion. This motion seeks to extend the period of effectiveness of the Credit Institutions (Stabilisation ) Act 2010, or CISA, as it is known, by a period of 24 months up to 31 December 2014. Scope for such an extension is provided for in section 69(1) of the Act, which states: "This Act (other than sections 51 and 67), ceases to have effect on 31 December 2012 or a later date substituted by resolution of both Houses of the Oireachtas." The motion seeks to substitute "31 December 2014" for "31 December 2012".

The motivation for the CISA legislation is expressed in the recitals set out at the beginning of the Act. These underscore the adverse impact of the banking crisis on our economy and the need, in the public interest, for strong powers to resolve the threat to the stability of the financial system generally. The preamble to the Act also highlights the necessity for the functions and powers provided under the Act to reorganise the guaranteed domestic credit institutions in the context of the National Recovery Plan 2011-2014 and the EU-IMF programme of support for Ireland.

The House is of course aware of the extraordinary and exceptional challenges that have confronted and still face our banking system and the economy. There is therefore a strong public interest in the continued availability of the extensive ministerial powers provided for in CISA to act on financial stability grounds to effect swift restructuring actions and recapitalisation measures. The purpose of the bank restructuring measures set out in the joint programme is to ensure that the sector is proportionate to the size and the credit needs of the economy. The aim was to capitalise the banks to the highest international standards, thereby rebuilding investor confidence in the Irish banking system and in due course restoring their access to normal market funding. The objective was to facilitate a significant reduction in the domestic Irish banking system's reliance on funding from the Eurosystem and the Central Bank of Ireland and put the Irish banking system on a more sustainable funding platform.

Under CISA, the Minister may, having consulted with the Governor of the Central Bank and formed certain opinions, make four types of proposed order addressed to relevant institutions - namely, direction orders, special management orders, subordinated liabilities orders and transfer orders - after which the Minister then applies to the High Court for an order in those terms. The Minister may also issue a number of binding requirements under section 50.

The Minister for Finance may make a proposed direction order, after which he must apply to the court for an order in those terms, directing a relevant institution to do or refrain from doing any act or thing, including directions to issue shares to the Minister or his or her nominee and increase the share capital of the institution to facilitate this. The Minister may also apply for the delisting of the relevant institution's shares, alter the institution's memorandum and articles or equivalent, or dispose of a specified asset, liability or part of the institution's undertaking.

The Minister for Finance may also make a proposed special management order, after which he must apply to the court for an order appointing a special manager to take over the management of the business of a relevant institution to carry on the business as a going concern with a view to preserving and restoring the financial position of the relevant institution. A special manager will have all necessary powers to discharge his functions, including having the sole authority over the directors and employees of the institution.

The Minister for Finance can, having formed certain opinions, make a proposed subordinated liabilities order in respect of certain relevant institutions and then apply to the Court for an order in those terms. A subordinated liabilities order operates to impose burden sharing on subordinated creditors in that institution. In taking this action, the Minister may have regard to a number of specified matters, including the extent and nature of financial support provided to the relevant institution and the amount of the relevant institution's indebtedness to its subordinated creditors. Furthermore, the Minister must be of the opinion, having consulted with the Central Bank, that the making of the subordinated liabilities order is necessary to secure achievement of the purpose of CISA or for the preservation or restoration of the financial position of the relevant institution.

The Minister for Finance can make a proposed transfer order in respect of the transfer of assets or liabilities of a relevant institution and then apply to the court for an order in those terms. Transfers can only be made to a willing transferee, and to facilitate such a transfer the Minister can provide financial incentives, including payments, loans and guarantees to the transferee. CISA addresses the transfer of foreign assets and liabilities, including those situated outside the EU.

CISA provides the possibility of recognition of the domestic measures to which I have just referred by other EU member states through the mechanism available in the European Communities (Reorganisation and Winding-up of Credit Institutions) Regulations 2011, which implement the credit institutions winding up directive in Ireland. This is particularly important given that many measures entered into by Irish credit institutions are governed by the laws of other EU member states.

CISA also contains provisions to ensure there is appropriate judicial supervision of the exercise of the Minister's powers after the making of proposed orders. These include a formal requirement to obtain, in all but exceptional circumstances, a written submission from an institution prior to the exercise by the Minister of any particular power. The Act also contains provisions for court involvement in the process on an ex-parte basis as part of the exercise of these powers by the Minister in order to ensure that the legislation offers appropriate legal and constitutional safeguards in light of the strong powers it confers on the Minister. Certain parties can apply to the court for the setting aside of orders made under the Act, which the court can direct in certain circumstances.

CISA powers have been exercised on 12 occasions, particularly in the first six months of 2011, during which the banking system was fundamentally restructured to meet the 31 July 2011 troika targets for the system. Members will recall the announcement made by the Minister for Finance in March 2011 on subordinated debt and the range of measures he introduced on that occasion concerning the pillar banks, including the application he made before the courts in respect of junior bondholders' taking a substantial reduction on their holdings in some of the banks as part of that restructuring process. It is fair to say that the overall cost of the exercise was substantially less than the cost we had anticipated at the time, given the subordinated debt reduction and the substantial sale of the majority holding in Bank of Ireland, which most investors would not have considered conceivable at the time of the March 2011 announcement. On ten of these occasions, the use of the powers was assessed and sanctioned by the High Court as required by the Act.

The most recent exercise of the powers was to enable the transfer of Irish Life to the Minister for Finance in March this year.

CISA enabled the Minister for Finance to take these essential actions quickly, efficiently and with legal clarity. The degree of restructuring of the banking sector achieved would not have been possible without the all-encompassing powers contained within CISA. Moreover, CISA was uniquely structured to prevent events of default on banks' financial instruments where restructuring intervention was necessary to achieve the Government's goals for the sector as a whole. This allowed the restructuring to take place without triggering a right for the holders of senior bonds and derivatives to demand immediate repayment or termination. I also note that the subordinated liability order mechanism under CISA was at the core of the State's ability to recover significant sums through the haircutting of subordinated or junior bondholders in the relevant institutions to which I referred. To date, every application to the Irish courts made by the Minister for an order pursuant to CISA has been successful.

A great deal has happened in the Irish banking sector since the passing of CISA in December 2010. The covered banks have continued to make overall progress under the financial measures programme, which was a rigorous analysis of the capital and liquidity requirements of the domestic banks presented in March 2011. I have made the point to the House repeatedly that the Irish banking system is now more heavily capitalised than, say, the Swiss banking sector in terms of funds following the prudential capital assessment review, PCAR, process put in place by the State. It has been hugely significant in terms of the ability of the Irish banks to do two things, the first of which is to stop the haemorrhaging of the outflows of deposits which was such a feature up to that time. Thankfully, we have now begun to see money coming back into the Irish banks, although not in a hugely significant way - I do not want to over-egg the pudding - but certainly that trend has stopped. The second aspect is the ability of the Irish banks, particularly the Irish pillar banks, to obtain funds on the inter-bank lending markets, something that was not conceivable or possible and did not happen for a very long period. These banks have progressed in regard to their recapitalisation, asset deleveraging, that is, the selling of significant assets they have around the world, deposit inflows and restructuring plans. The recapitalisation of the PCAR banks, that is, AIB, Bank of Ireland and Permanent TSB, and the IBRC has been successfully completed.
In regard to deleveraging,this has been progressed well and total covered bank deleveraging of about ¤63 billion had been achieved up to the end of September this year. Further significant disposals have also been targeted for completion by the end of the current quarter of 2012 as part of the pillar banks' planned rundown of non-core balances.

As regards funding,the banks' positions have improved significantly. Deposits in AIB, Bank of Ireland and PTSB have stabilised, with a gain in net inflows achieved since last year; international debt markets have opened up to the Irish banks, as we have seen recently. Both Bank of Ireland and AIB have managed to raise significant funds independent of any guarantee, which, again, would not have been thought possible a year and a half ago, but that has happened and is a very positive step. As part of the EU-IMF programme, the Irish authorities submitted revised restructuring plansfor all participating institutions by the end of September this year.

In regard to the eligible liabilities guarantee, ELG, scheme which was before the House recently, a working group chaired by the Department of Finance and involving both the Central Bank and the NTMA has developed a strategy to exit the scheme in a way that is consistent with preserving financial stability. The initial indications from the strategy are that a withdrawal of the ELG scheme could occur in the first quarter of 2013. When I was before the House recently, I made the point to Senators that the withdrawal of the ELG scheme would be a significant development and I hope that will occur in the early part of next year. It would be a strong signal to the banking sector that it could then return to some profitability based on its ability to obtain funds independent of any guarantee into the future. That would be part of the normal process of transformation one would expect for the pillar banks and I hope that will happen early in the new year. Depositors will be given sufficient notice in advance of the withdrawal of the scheme and any change in thatregard will be brought to the attention of the Houses of the Oireachtas as part of that process. The guarantee will remain for funds that have been guaranteed until the endpoint of the time for which they were taken out. I understand a five year time limit has been set; therefore, the clock started at the beginning and will stop at the endpoint, independent of any guarantee in place.

The work carried out on the restructuring of Irish financial institutions using the various powers provided for under CISA is not yet complete. Without retaining CISA powers for another period, it is unlikely the Government would be able to be complete the process. In particular, it is expected that orders may be sought under CISA in a number of transactions, including possible further restructuring of the Irish banks that may require a direction order and-or transfer order to implement. We have seen how a great deal of progress has been made in restructuring. However, the process is not yet concluded and it is vital that the Minister for Finance continue to be empowered with the statutory authority and have very clear powers to take any remaining necessary step as may be appropriate to ensure the process is completed.

The failures in the banking sector almost brought the country to its knees. We need decisive powers to tackle the mess out of which we are getting. Extending the period of effectiveness of CISA is imperative to being able to fully meet that objective. The Governor of the Central Bank is in agreement with the Minister for Finance that the provisions of the Act should, therefore, be available for an extended period to the end of 2014. I commend the motion to the House.