That Dáil Éireann resolves for the purposes of section 69 of the Credit Institutions (Stabilisation) Act 2010, that with effect as on and from the date of this Resolution, in subsection (1) of the said section 69 for the words '31 December 2012' there shall be substituted the words '31 December 2014'."
The motion before the House seeks to have the period of effectiveness of the Credit Institutions (Stabilisation) Act 2010, known as CISA, extended for a period of 24 months up to 31 December 2014. Section 69 of the Act provides that the Act, other than sections 51 and 67, will cease to have effect on 31 December 2012 or a later date substituted by resolution of both Houses of the Oireachtas. The motion, accordingly, seeks to substitute "31 December 2014" for "31 December 2012".
For the benefit of the House, I will set out the background to the need for CISA. The rationale for the CISA legislation is expressed in the detailed set of recitals included in the Act. They highlight the adverse impact of the banking crisis on the 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 stresses 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 European Union-IMF programme of support for Ireland. The Preamble also reiterates the basic justification for the very substantial financial support provided by the State for the banking system. This is to make certain that these institutions continue to meet their financial and regulatory obligations in order to maintain public confidence in the banking system and, in particular, the security of deposits. The banking system and the economy have faced and continue to face extraordinary and exceptional challenges. There is a strong public interest in the continued availability of the extensive ministerial powers included in the Act, the details of which I will outline to the House.
The House is aware that CISA provides broad powers for the Minister for Finance to act on financial stability grounds to effect swift restructuring actions and recapitalisation measures as envisaged in the programme agreed with the external authorities. The purpose of the bank restructuring measures set out in the joint programme is to ensure the sector is proportionate to the size and credit needs of the economy.
The objective 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 aim was to facilitate a very significant reduction in the domestic Irish banking system's reliance on funding from the euro system and the Central Bank of Ireland, and put the Irish banking system on a more sustainable funding platform.
The range of powers provided to the Government under CISA remains at the core of the Government's ability to take the actions required under the troika's programme of support in addition to the national recovery plan for the period 2011 to 2014 in respect of the banking system.
The House will be aware that, under CISA, the Minister may, having consulted the Governor of the Central Bank and formed certain opinions, make four types of proposed orders 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. These are important powers and it is important that they be retained if we are to continue to have the necessary ability to manage our way out of this economic and banking crisis.
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; apply for the delisting of the relevant institution's shares; alter the institution's memorandum and articles, or equivalent, including changes to shareholders' rights, 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 special manager will provide the Minister for Finance and the Central Bank with any reports or other information requested. The appointment of a special manager can prevent the winding up of the institution and other specified consequences. The special manager can, with the consent of the Minister and the Governor, substitute his or her decision for a decision of the shareholders. The special manager can remove directors, employees, etc. The special-manager power is designed to introduce stability into relevant institutions where that is necessary to ensure financial stability generally.
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 that relevant institution, the amount of the relevant institution's indebtedness to its subordinated creditors, and other matters. 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 the achievement of a 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 relation to 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 European Union.
CISA provides the possibility of recognition of the domestic measures I referred to by other EU member states through the mechanisms available in the European Communities (Reorganisation and Winding-up of Credit Institutions) Regulations 2011, which implement the CIWUD directive in Ireland. This is particularly important given that many agreements entered into by Irish credit institutions are governed by the laws of other EU member states. In addition, if required, the Minister may take proceedings in other jurisdictions to enforce an order made under the Act.
The House will be aware that CISA 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 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.
Let me outline how CISA powers have been used in the past two years. CISA powers have been exercised on 12 occasions, most notably in the first six months of 2011 when the banking system was fundamentally restructured to meet the 31 July 2011 troika targets for the system. On ten of those occasions, the use of the powers were assessed and sanctioned by the High Court as required by the Act. Most recently, the powers were exercised to enable the transfer of Irish Life to the Minister for Finance in March of this year.
CISA enabled the Minister for Finance to take these essential actions quickly, efficiently and with legal clarity. The level of restructuring of the banking sector which has been achieved would not have been possible without it. In addition, CISA is uniquely structured to prevent events of default on banks' financial instruments from arising where restructuring intervention was necessary to achieve the Government's goals. 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.
The House should be aware that the subordinated liability order mechanism under CISA was at the heart of the State's ability to recover significant sums through the haircutting of subordinated bondholders in the relevant institutions. To date, every application to the Irish courts made by the Minister for an order pursuant to CISA has been successful.
Let me now consider how the Irish banking sector is doing. Much has happened in the Irish banking sector since the passing of CISA. The covered banks have continued to make overall progress under the financial measures programme – the rigorous analysis of the capital and liquidity requirements of the domestic banks presented in March 2011 – and have advanced in terms of recapitalisation, asset deleveraging, deposit inflows and restructuring plans.
The recapitalisation of the PCAR banks – Allied Irish Banks, Bank of Ireland, Permanent TSB and IBRC has been successfully completed. According to the survey on European banks carried out by the European Banking Authority and published late last year, the Irish banks more than met the minimum standard that was set down for core tier-1 capital ratios of 10.5%.
Deleveraging has been progressing well, and total covered bank deleveraging of about €63 billion has been achieved up until 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 run down of non-core balances.
With respect to funding, the banks' positions have improved significantly. Deposits in Allied Irish Banks, Bank of Ireland and in Permanent TSB 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, and reliance on ECB funding sources has decreased. Finally, as part of the EU-IMF programme, the Irish authorities had submitted revised restructuring plans for all the participating institutions by the end of September 2012.
With regard to the eligible liabilities guarantee scheme, ELG, 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 consistent with preserving financial stability. In the context of the recent visit of the troika partners and the eighth review of the support programme, it was agreed that such a strategy would be finalised by the year's end.
The early indications from this strategy are that a withdrawal of the scheme could occur in the first quarter of 2013. Depositors will be given sufficient notice in advance of the withdrawal of the scheme and changes in that regard will be brought to the attention of the House as part of that process.
The House will be aware that much work has been carried out on the restructuring of the Irish financial institutions using the various powers provided for under CISA. However, this work is not yet complete and, without retaining CISA, is unlikely to be able to be completed by the Government. In particular, 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. It also continues the protection it affords the people from problems in the financial system while turbulent economic conditions continue internationally.
The Central Bank and the Credit Institutions (Resolution) Act 2011, known as the resolution Act, contain some comparable powers to those provided for under CISA. However, these resolution powers are vested in the Central Bank, not the Minister for Finance, and designed to be exercised where regulatory intervention is required because a problem appears in an individual bank in an otherwise normally functioning system. It can be referred to as a steady state resolution regime where the problem is in a particular institution in an otherwise fully functional banking system. Resolution Act powers are not designed for the comprehensive restructuring of the banking system and the triggers for the exercise of the powers are very different from those of CISA, which are based on the country's need to restructure out of the ongoing international systemic banking and debt crisis.
Overall, we have seen that much progress has been made in restructuring the banking system. However, it is not over yet and it is imperative that the Minister for Finance continue to be empowered with the statutory authority to take any remaining necessary step as may be appropriate to ensure this process is completed. We are getting out of the mess. Extending the period of effectiveness of CISA is crucial to our being able to meet that objective. The Governor of the Central Bank is in agreement with me that the provisions of the Act should, therefore, be available for an extended period to the end of 2014. I strongly recommend the motion to the House.