Pearse Doherty (Donegal South West, Sinn Fein)
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43. To ask the Minister for Finance when the operational framework and guidelines for the use of the ESM direct recapitalisation tool will be finalised; and if he will make a statement on the matter. [14242/14]

Pearse Doherty (Donegal South West, Sinn Fein)
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45. To ask the Minister for Finance the way the ESM direct recapitalisation instrument will play a role in banking union and the separation of banking and sovereign debt; and if he will make a statement on the matter. [14246/14]

Michael Noonan (Limerick City, Fine Gael)
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I propose to take Questions Nos. 43 and 45 together.

The Euro-area Heads of State or Government (HoSG) agreed in June 2012 that "it is imperative to break the vicious circle between banks and sovereigns", and that when a Single Supervisory Mechanism (SSM), which forms part of an overall Banking Union proposal involving the ECB, is in place and operational, the European Stability Mechanism (ESM) will have the possibility to recapitalise banks directly. The Eurogroup meeting of 20 June 2013 agreed on the main features of the European Stability Mechanism's Direct Recapitalisation Instrument or DRI. The DRI will come into effect when the SSM is in place and operational. This is not expected to take place until late in the current year.

The operational framework of the DRI has been discussed at ministerial level and the aim is to complete this discussion as soon as possible in order to allow the ESM Member States sufficient time to complete any necessary national procedures before the SSM comes into effect later this year. The overall Banking Union proposal involves an integrated system for the supervision of cross-border banks in the form of the SSM; harmonised EU rules on deposit guarantee schemes ('DGS'); a European resolution scheme commonly referred to as the Bank Recovery & Resolution Directive (BRRD) and; aSingle Resolution Mechanism (SRM)to coordinate the application of resolution tools to banks under the Banking Union.

As you are aware, one of the core objectives of Banking Union is to break the link between the sovereign and the banking sector by strengthening the banking system and making it more resilient. A key feature is the need to provide authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing bank so as to ensure the continuity of a bank's critical financial and economic functions whilst minimising the impact of a bank's failure on the economy and financial system, by requiring that shareholders bear losses first followed by creditors while at the same time minimising the costs for taxpayers.

Banking supervision in the EU is currently the responsibility of the Member States. However, the financial crisis showed that national supervision has not always been effective in spotting problems in banks. Also it showed how quickly problems in the financial sector of one country can spread to another i.e. contagion. Therefore, the European Commission has overseen the establishment of the SSM. The SSM will act as a central authority that oversees the key aspects of the activities of banks in the euro area. This is particularly important in order to ensure an effective overview of trans-national banking groups, which often have subsidiaries in many countries. The SSM is the basis for the next steps towards the banking union. This reflects the principle that the ESM will have the possibility to recapitalise banks directly when the SSM is in place and operational.

The objective of the ESM's DRI will be to preserve the financial stability of the euro area as a whole and of its Member States in line with Article 3 of the ESM Treaty, and to help remove the risk of contagion from the financial sector to the sovereign by allowing the recapitalisation of institutions directly. I remain confident that the commitment made by the EU HoSG in June 2012 to break the vicious circle between banks and sovereigns will be respected.

Pearse Doherty (Donegal South West, Sinn Fein)
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44. To ask the Minister for Finance the way the single resolution fund will play a role in banking union and the separation of banking and sovereign debt; and if he will make a statement on the matter. [14245/14]

Michael Noonan (Limerick City, Fine Gael)
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The Single Resolution Mechanism (SRM) is a centralised resolution mechanism for Member States who belong to the Single Supervisory Mechanism (SSM). Its purpose is to ensure that resolution can take place at the same level as supervision, rather than being conducted at national level.  It is considered as an important contributing factor to breaking the link between the sovereign and the banking sector.

The SRM will allow decisions to be made in a more objective and independent fashion than if they were been made by national supervisors. The proposal which has been agreed sees the SRM taking its decisions in line with the principles of resolution set out in the Bank Recovery and Resolution Directive in particular that shareholders and creditors should bear the costs of resolution before any external funding is granted, and private sector solutions should be found instead of using taxpayers' money.  It is felt that in most scenarios, contributions by shareholders and creditors should be sufficient to finance resolution. If exceptionally, additional resources were needed a Single Resolution Fund with a target level of 1% of covered deposits within the Banking Union (approx. €55bn) will come into place as a last resort to finance the bank resolution process.

In the General Council approach reached on SRM at the extraordinary ECOFIN on 18 Dec, it was agreed that as part of the overall compromise that aspects of the SRM relating to financing be carved out of the Regulation, in particular the transfer of contributions from national resolution funds to national compartments in the SRM, and gradual mutualisation of national compartments in the SRM over a 10 year period. This approach was adopted because certain member states  were not satisfied that Article 114 provided an appropriate legal basis for the operation of the Single Resolution Fund. It was agreed that an Intergovernmental Agreement would cover these matters.

Under the recently reached agreement between the Greek Presidency and the European Parliament, the transition period to a fully mutualized SRF has been reduced to 8 years. In addition the pace of mutualisation has been significantly increased in such a way that within two years 60% mutualisation will occur with the balance being achieved in a linear fashion up until the end of year 8. What this means in practical terms is that if a bank is failing or likely to fail the first step is that the bail-in rules will be applied to losses. If there are still losses to be absorbed, the next point of contribution will be the funds within the Member State's national compartment in the SRF, followed by the mutualised part of the national compartments of other Member States. After 8 years the SRF will be fully mutualised.