Written answers

Thursday, 16 May 2013

Department of Finance

Banking Sector Issues

Photo of Stephen DonnellyStephen Donnelly (Wicklow, Independent)
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93. To ask the Minister for Finance the legal basis for the statement that holders of bonds in banks be ranked pari passu with depositors in the event of insolvency of a bank; and if he will make a statement on the matter. [23386/13]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The legal position is that in the absence of a subordination agreement, where a financial institution is being wound up the principle that applies is pari passu. This means that holders of bonds in banks have equal ranking with depositors to be repaid in the event of insolvency of the financial institution. So, where there is a shortfall in assets all unsecured creditors are entitled to an equal dividend. The principle of creditor equality is also enshrined in the Credit Institutions Winding Up Directive 2001/17/EC.

In the context of a company that is continuing in business as a going concern the principle of pari passu does not apply although the effect is similar. Where a company has debts, they are liable to pay those debts and each debtor has an equal right to be repaid whether that person's debt arises on foot of a bond or a deposit. In either case the terms of the repayment will obviously be determined by the instrument creating or evidencing the debt - repayable on demand or at a certain future time. I would add that the principle of equal entitlement to be repaid their debts as amongst unsecured creditors is subject to the absence of one of them being obliged by contract to be postponed in favour of another.

It must also be remembered that eligible depositors who suffer a loss in the event of a financial institution being wound up insolvent are entitled to compensation under the Deposit Guarantee Scheme. The Deposit Guarantee Scheme covers all retail deposits with all credit institutions authorised in Ireland (including credit unions) up to a maximum of 100,000 euro per qualifying depositor per institution.

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