Written answers

Tuesday, 23 October 2012

Department of Finance

Banking Sector Regulation

Photo of Clare DalyClare Daly (Dublin North, Socialist Party)
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To ask the Minister for Finance in relation to default insurance on banking loans, if this is normal practise; if there is a legal regulation or any rule of enforcement stating that a bank must insure its loans against default; with whom is this insurance policy in place; if there is any legal regulation for financial institutions and banks to retain a provision fund or deposit account to clear defaulted loans; if yes, what is the regulation, if no, is it common practice to set up such accounts regardless and time limit within which a bank must clear defaulted loans. [46256/12]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I am advised by the Central Bank, that there is no requirement on financial institutions, legal or otherwise, to avail of such insurance. International accounting rules that apply to financial institutions dictate that financial institutions provide for bad or doubtful debts. Carrying these loans with a provision against them for the expected loss provides leeway for the distressed borrower to regularise their situation and may result therefore in the financial institution recovering more than had been provisioned for.

In 2011, the Central Bank of Ireland published Impairment Provisioning and Disclosure Guidelines in relation to the development and application of impairment provisioning frameworks. The paper sets out the policies, procedures and disclosures which institutions should adopt for their loan asset portfolios which are subject to impairment review in accordance with International Accounting Standards. These guidelines are available on the Central Bank website.

Photo of Clare DalyClare Daly (Dublin North, Socialist Party)
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To ask the Minister for Finance with regard to general issues around bank license necessary for operation here, where copies of the licenses, and licence conditions under which banks function, are available; if licence conditions for non-Irish banks operating here are different than domestic banks; if it is possible to trade as a bank without a licence; the person responsible for monitoring compliance with licence conditions; the legal consequences for banks and their customers of a breach of license conditions; if agreements entered into while a bank is operating in breach of one or more conditions of its licence are legally binding; if a bank selling loans and mortgages while insolvent is in breach of the conditions of its licence; the date on which the review of licence conditions took place; where copies of the banking licences of those banks now technically in public ownership are available to members of the Oireachtas for examination. [46257/12]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The Central Bank is responsible under statute for issuing bank licences and subsequently regulating the compliance of credit institutions with conditions imposed on their respective licences. As Minister for Finance I would have no role in reviewing licence conditions imposed by the Central Bank in its regulatory capacity. I have been informed by the Central Bank that it does not comment on the individual licence conditions imposed on specific credit institutions and that once a licence is issued it becomes the property of the relevant credit institution and thus the Central Bank retains no right to publish copies. Copies are kept by the Central Bank but they are not available for examination. However, pursuant to Section 12(1) of the Central Bank Act 1971, the Central Bank publishes a full list of authorised credit institutions and their status on its website.

The Central Bank does not impose any general restrictions on foreign credit institutions operating in Ireland. However, the Central Bank has the power to impose specific licence conditions on any domestic or foreign credit institution licensed to operate in Ireland. Each individual application for a licence is considered and treated on an individual basis to determine which conditions will apply.

Section 7 of the Central Bank Act 1971 (as amended) provides that ‘Subject to the provisions of this Act, a person, other than a Bank, shall not, in or outside the State, carry on banking business or hold himself out or represent himself as a banker or as carrying on banking business or on behalf of any other person accept deposits or other repayable funds from the public, unless he is the holder of a licence’. Under section 58 of the Central Bank Act 1971, contravention of section 7 is an offence. Therefore it is not possible to operate as a bank in the absence of a licence without committing an offence.

The Central Bank is responsible for monitoring whether or not credit institutions are complying with any conditions imposed on their respective licenses. Credit Institutions are also responsible for monitoring their compliance with licence conditions and reporting any breaches to the Central Bank.

The Central Bank may impose conditions on the licence of a bank pursuant to section 10 of the Central bank Act 1971. The failure by a bank to comply with a condition which the Central Bank has imposed is a serious matter as reflected in the consequences of such a failure, these include:

a) section 58 of the Central Bank Act 1971, provides that the contravention of such a condition is a criminal offence and may, on summary conviction, lead to a fine not exceeding €1,270 or to a imprisonment for a term not exceeding 12 months or both or, on conviction on indictment, to a fine not exceeding €63,500 or to imprisonment for a term not exceeding 5 years or both;

b) The Central Bank may utilize its administrative sanctions powers under section 33AQ of the Central Bank Act 1971 which could expose the bank to a sanction of €5,000,000.

c) Furthermore, the Central Bank (Supervision and Enforcement) Bill 2011 provides that such a sanction may include suspension or revocation of a banking licence.

Section 11 of the Central Bank Act 1971 sets out the grounds for revocation of a bank licence including if the holder becomes unable to meet his obligations to his creditors or suspends payments lawfully due.

In the event of a customer being affected by a credit institution operating in breach of regulatory requirements, that customer has in the first instance the option of seeking redress from the institution in question. Failing that or if the customer is not satisfied with the outcome, there is the option of bringing the dispute to the Financial Services Ombudsman or the Courts.

I propose to shortly bring forward amendments at Committee Stage of the Central Bank (Supervision and Enforcement) Bill which will introduce greater clarity for customers seeking compensation for losses arising from the failure of a credit institution to comply with its obligations.

The Central Bank Act 1971 does not deal with the question of the validity of any contract entered into by a bank in breach of the requirement to hold a banking licence and the consequences of such would have to be assessed by the Courts on the face of each case before them .

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