Pearse Doherty (Donegal, Sinn Fein)
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141. To ask the Minister for Finance if an alterative rule based on a minimum investment grade for bank bonds will be put in place of the current severe restrictions on credit unions investing in bank bonds; and if he will make a statement on the matter. [8153/18]

Paschal Donohoe (Dublin Central, Fine Gael)
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In 2017, the Central Bank undertook a review of the investment framework for credit unions. In May 2017, consultation paper 109, CP109, was published which consulted on a number of potential changes to the investment framework. CP109 outlined the Central Bank’s view that any changes to the investment framework for credit unions should reflect the fact that it is the savings of credit union members, which can be withdrawn on demand, that will be invested by credit unions and that the risk profile of credit union investment portfolios should reflect this.

Taking account of the resolution framework introduced under the Banking Recovery and Resolution Directive, BRRD, CP109 outlined an intended change to the definition of bank bonds to clarify that bonds that are subordinated to any unsecured creditor including senior bank bonds issued by a credit institution do not fall within the definition of “bank bonds” set out in the regulations. It also outlined that credit unions will need to ensure that they confirm that instruments are not subordinated debt instruments prior to making an investment to ensure that they remain in compliance with investment regulations.

On 1 February 2018, the Central Bank published the feedback statement on CP109 and amending investment and liquidity regulations for credit unions. These amending regulations will commence on 1 March 2018. These regulations reflect a change to the definition of bank bonds which precludes investment by a credit union in bonds that are subordinated to any other liability of a credit institution, including senior bank bonds, in recognition of their risk profile and complexity. This preclusion for credit unions reflects the potential implications for credit unions should such instruments be written down or converted to equity upon the failure of a credit institution. 

Credit unions will continue to be permitted to invest in senior bank bonds and the Central Bank understand that a number of European credit institutions are likely to continue to issue senior bonds. Additionally, as minimum requirement for own funds and eligible liabilities, MREL, ‘buffers’ are established it is expected that domestic credit institutions will resume issuance of senior bank bonds in the future given the lower associated funding cost relative to subordinated bank bonds. 

The Central Bank has informed me that, notwithstanding the credit rating of bank bonds generally, it is not deemed appropriate for credit unions to be holders of instruments such as subordinated bank bonds specifically designed to absorb losses in a resolution scenario as it would directly expose them to burden sharing in line with EU Commission policy, and has consequences for the resolvability of issuing credit institutions raising the risk of taxpayer bail outs.

Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis, ‘Banking Communication’ (2013/C 216/01).

Pearse Doherty (Donegal, Sinn Fein)
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142. To ask the Minister for Finance if the existing counterpart limit of 25% in regard to credit union investment will be maintained in view of the fact there have been no regulatory issues as a result of the current rate; and if he will make a statement on the matter. [8154/18]

Paschal Donohoe (Dublin Central, Fine Gael)
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In 2017, the Central Bank undertook a review of the investment framework for credit unions, which indicated that there existed a significant level of concentration in credit union investment portfolios in relation to both investment product and counterparty.

In May 2017, consultation paper 109, CP109, was published which consulted on a number of potential changes to the investment framework. CP109 proposed the reduction in the counterparty limit from 25% to 20% of total investments to assist the objective of increased levels of diversification in investment portfolios.

Feedback received to the consultation indicated that credit unions did not view it as an appropriate time to reduce the counterparty limit, citing the current low interest rate environment and the exit of certain counterparties from the market as challenges to meeting a reduced counterparty limit.  

Taking account of the feedback received through submissions to CP109, the Central Bank undertook further analysis on credit union sector investment counterparties to understand further the likely impact which a reduction in the counterparty limit would have. This analysis indicated that for the majority of credit unions a reduction in the counterparty limit will not pose a significant challenge.  

On 1 February 2018, the Central Bank published the feedback statement on CP109 and amending investment and liquidity regulations for credit unions. These amending regulations will commence on 1 March 2018. These regulations include a reduced counterparty limit of 20% of total investments for credit unions. Transitional arrangements have been extended which will provide a period of two years from commencement of the regulations for credit unions to become compliant with the reduced counterparty limit. In addition, credit unions will be permitted to hold to maturity any fixed term investments which they hold at commencement of the regulations which result in them being non-compliant with the reduced counterparty limit. 

The Central Bank have informed me that it is its view that the reduction in the counterparty limit is appropriate to assist in driving diversification in investment portfolios and, taking account of the additional counterparties which will be available to credit unions as a result of changes to the permitted classes of investments being introduced. Additionally, the changes being introduced to the liquidity framework for credit unions and the increases to concentration limits for certain permitted classes of investments will assist credit unions in meeting this requirement. Further detail on these changes is included within the feedback statement on CP109 published on the Central Bank website.

Pearse Doherty (Donegal, Sinn Fein)
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143. To ask the Minister for Finance if effective and proportionate regulations will be reintroduced further to section 43(5) of the Credit Union Act 1997. [8155/18]

Paschal Donohoe (Dublin Central, Fine Gael)
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Section 43 of the Credit Union Act, 1997 outlines the legislative requirements in relation to credit union investments. It states that a credit union shall manage its investments to ensure that those investments do not, taking account of the nature, scale, complexity and risk profile of the credit union, involve undue risk to members' savings and for that purpose, before making an investment a credit union shall assess the potential impact on the credit union, including the impact on the liquidity and financial position of the credit union. Section 43(3) provides the Central Bank with the power to make regulations in relation to investments.

The current investment regulations for credit unions are contained in the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016. In 2017, the Central Bank undertook a review of the investment framework for credit unions. In May 2017, Consultation Paper 109, CP109, was published which consulted on a number of potential changes to the investment framework. Following completion of a public and statutory consultation process, the Central Bank published a feedback statement on CP109 and amending investment and liquidity regulations for credit unions. On 1 March 2018, new investment regulations will be introduced for credit unions through the commencement of the Credit Union Act 1997 (Regulatory Requirements) (Amendment) Regulations 2018. These new investment regulations introduce three additional investment classes for credit unions, supranational bonds, corporate bonds and investments, in tier 3 Approved Housing Bodies, AHBs, along with associated limits and requirements. Investment in tier 3 AHBs has a differentiated concentration limit dependent on the asset size of the credit union.

The Central Bank has informed me that it views that these new regulations are effective and proportionate for credit unions and that there is a need for credit unions to fully understand the risks associated with all investments, ensure that they are in line with the risk appetite of the credit union and comply with all legislative and regulatory requirements. 

The Central Bank has indicated that it will undertake and publish analysis of credit union sector investments, two years post commencement of the amending regulations to assess and analyse the actual impact which the changes to the investment framework have had.