I understand that the Minister must depart at 5.10 p.m. or 5.15 p.m. I welcome him and his officials before the committee this afternoon. The format of the meeting is that the Minister will make some opening remarks which we will follow with a question and answer session. I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off. Members are reminded of the long-standing rule of the Chair to the effect that they should not comment on, criticise or make charges against either a person outside the Houses or a official by name or in such a way as to make him or her identifiable. I invite the Minister to make his opening statement, following which we will have the question and answer session.
Review of ECOFIN Matters under Irish EU Presidency: Discussion
We are now at the end of the 7th Irish Presidency of the European Union. I am happy to report to this committee that it has, in my view, been a very successful one for the Department of Finance and it has, in many respects, exceeded our expectations when we were planning the Presidency in 2012.
I wish to give the committee an overview of the achievements of the Presidency in the past six months. We had six formal ECOFIN Councils and one highly successful informal ECOFIN in Dublin. Much work was achieved in these Councils in terms of getting agreement on specific files and on managing the business of the Council. However, the Presidency is more than achieving agreement at ECOFIN - important as that is - it is also carried on in work in Council working parties, engagement with the European Parliament and engaging with the European institutions. There is also the practical organisational work which often occurs behind the scenes. Without all this work we would not have had such a successful Presidency.
The aims of the Presidency for the ECOFIN Council were set out in our list of priorities published at the end of 2012. We set ourselves a number of objectives under the broad thematic heading of stability, jobs and growth. We achieved much of what we set out to achieve last January, and I consider that what we proposed to achieve at that stage was, by any standards, an ambitious package of objectives. Indeed, in financial services we have achieved significantly more than was planned. We planned to carry out work on economic governance – principally in the management of the European semester process and in seeking agreement on the two pack of economic surveillance measures for the eurozone. In financial services we prioritised work on the banking union proposals designed to break the link between the financial sector and the sovereign. We targeted agreement on the capital requirements directive, the single supervisory mechanism, and bank resolution and recovery.
We had the Council agree 2014 budget guidelines. On 19 February, my colleague, the Minister of State, Deputy Brian Hayes, presented to the European Parliament's Committee on Budgetary Control the Council's recommendation on the discharge to be given to the Commission for the implementation of the 2011 budget.
One notable difference between this Presidency and previous Presidencies has been the significant role the European Parliament plays as co-legislator in many policy areas. Much work has been done at administrative and political level in negotiating with the Parliament on a wide range of policy areas. The Irish Presidency worked well with the Parliament in achieving the objectives of the Presidency and it is important that a level of engagement is maintained with the Parliament at political and official level. I also note the engagement between the Dáil and European Parliament, which is an important development.
In running a Presidency, there is always the possibility that national interests may not receive the appropriate attention they deserve and we have worked hard with regard to this scenario. We have focused on national issues while at the same time concluding a successful Presidency. We have managed to focus on national interests where there is a European dimension. For example, we delivered a deal on the promissory note issue, secured the extension of maturities on EFSF and EFSM loans and kept open the possibility of retrospection in the framework for the ESM in terms of direct bank recapitalisations. This latter objective is important for Ireland.
The Presidency also has an international dimension. I represented the European Union at the G20 and IMF-World Bank meetings. This allowed me to support progress on issues conducive to renewed growth at EU level and enabled me to promote confidence in Ireland among our international partners in the European recovery process.
The theme of our Presidency was stability, jobs and growth. In our short six-month period, we consider that we have helped advance the European agenda to set the conditions for a more stable currency and a better financial system with greater credibility that can begin to lend to all businesses. In terms of improved economic governance, measures to be implemented at national level include the full implementation of country-specific recommendations from the European semester process for the relevant member states. This includes the pursuit of differentiated and growth-friendly consolidation, the restoration of normal lending to the economy and the promotion of competitiveness.
While financial and economic stability is important and a precondition for growth, it is not sufficient to drive economic recovery. Europe needs to continue to address the legacy associated with the financial crisis and to be more forward-thinking and take action to drive a reinvigorated growth strategy. Given the limited availability of public financial resources and constraints on bank lending as a result of post-crisis deleveraging, it is now essential to explore how the financial system - markets, institutions and financial instruments - can be used to channel available savings towards the financing of infrastructure projects and enterprise, particularly small and medium enterprises. The recent European Commission Green Paper on Long Term Financing of the European Economy is an important development as it proves that this is a key policy issue for Europe. Arising out of discussions at the informal ECOFIN in Dublin, a high level expert group on long-term finance and SMEs has been established. This expert group is co-chaired by Mr. John Moran, Secretary General of my Department, and will publish its report in the autumn. We have also been active in supporting changes to the role of the European Investment Bank in terms of its ability to expand its lending and promote growth across all member states.
A successful Irish Presidency has been important in helping to restore and enhance our reputation in the European Union and across member states. It demonstrates that we are serious and capable of achieving change in many areas of European Union legislation and policy, which benefits all its citizens, not just those in Ireland. It also demonstrates that a small member state can impact and influence the European agenda, which is of great importance to Ireland.
I hope we can build on a successful Presidency to increase our influence in Europe. Our influence on the European agenda has been achieved through the Presidency's facilitation of agreement in the Council and with the Parliament. No Presidency can impose solutions on either the Council or the Parliament. It cannot impose its own views on other member states or the European institutions. In the role of the Presidency, it is necessary to deal with conflicting interests and opinions and broker solutions with which all parties can live. We have a very good track record after six months in negotiating and seeking agreement.
I thank all the officials in my Department for the contribution they have made to the success of the Presidency. This contribution is evident across policy and operational areas, all of which have contributed to its success. I also thank all those officials in the Irish Permanent Representation in Brussels who contributed significantly to the success of the past six months. I thank the Chairman and members for their attention.
We also committed ourselves to make progress on the markets in financial investments directive and regulation known as MiFID and MiFIR, market abuse regulation, MAR, and the mortgage credit directive. We had a number of taxation priorities. We intended to agree the method for discussing the financial transaction tax so that those who wanted to participate could go forward with those discussions; work on proposals to prevent VAT fraud and avoidance; work on the Commission proposal on strengthening the fight against tax fraud and evasion; work towards agreement on the savings directive and the negotiating mandate with third countries.
As regards the EU annual budget, we planned to manage this process efficiently in terms of working on the annual budget for 2013 and the preparation of guidelines for the 2014 budget.
There is no doubt we have achieved a significant amount of progress on the financial services agenda. Banking union represents the first stage of Economic and Monetary Union and as such progress on building banking union was given the highest priority by the Irish Presidency. Stability in the Union’s banking system will promote trust, credibility and confidence both within the EU and beyond, and will contribute to a return to investment and growth and will promote trust and credibility. A complete banking union requires common supervision, deposit insurance and a common resolution framework, with an appropriate fiscal backstop. We made considerable progress in advancing that agenda.
Our first step was to reach agreement on the capital requirements package, which will improve the stability of the banking system by increasing the effectiveness of the regulation and the resilience of banks across the EU. This package is a vital part of the single European banking rulebook, a fundamental building block for EU banking union.
The next step was to reach agreement with the European Parliament on the setting up of a single European banking supervisor and the amendments to the European Banking Authority, EBA, regulation. Under this agreement the ECB, as common supervisor, will take over responsibility for all major or systemically important banks from national central banks from mid-2014. National central banks will continue to play an important role, but the ECB will have the ultimate responsibility for the system. The system provides for a differentiated approach to supervision depending on the size and significance of the banks. It provides for equal treatment for euro-area and non-euro area member states to allow banking union to be attractive to all 27 member states, thereby protecting the single market.
After we reached this agreement on common supervision we then focused all resources in this area on progressing the banking resolution and recovery directive. There were difficult discussions at the May meeting and at the recent ECOFIN on this file. We worked hard over two long meetings to get political agreement in the Council. I hope now that we can get agreement with the Parliament on this important file before the end of 2013. This agreement will effectively move us from ad hoc "bail-outs" to structured and clearly defined "bail-ins" as the rule. Therefore, in the event of future banking failures taxpayers will be protected.
These are all important measures but there is more work to be done on resolution mechanisms and on deposit guarantees. The agreement on bank resolution and recovery was a prerequisite to any agreement on deposit guarantee schemes between the Council and the European Parliament. I am hopeful that agreement can be now achieved as quickly as possible on deposit guarantees, in parallel to the banking resolution and recovery directive, BRRD, engagement with Parliament.
We must break the link between banks and sovereign and the Irish Presidency has prioritised and made significant strides on key files over the past six months that deliver on this objective to build a banking union.
During our Presidency we have also been mindful of other aspects of the financial services agenda. We achieved provisional political agreement on the Mortgage Credit Directive which will allow for rapid implementation of new rules benefiting mortgage holders and consumers across Europe. We hope this directive can be adopted at first reading in the coming months.
We have also reached a political agreement on the Transparency Directive which aims to enhance the information available about the issuers of securities on a regulated market. This directive will increase the attractiveness of regulated markets for small and medium-sized issuers.
We agreed a Council general approach on Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (MiFIR), which now opens the way for productive trilogue negotiations with the European Parliament on this very important file. This represented some achievement for the Irish Presidency, as polarised member state positions on key aspects of MiFID had characterised the debate under previous Presidencies. It was also important to achieve agreement on this file, given that it is a G20 commitment.
On the other market files, we reached agreement on Market Abuse Regulations (MAR) and agreement in Council on Packaged Retail Investment Products (PRIPS). We made significant progress in Council on the Central Securities Depositaries Regulation, and commenced discussions on the 4th Money Laundering Directive.
On the few occasions where it has not been possible to bring discussions to conclusion we have prepared them for hand over to the Lithuanian Presidency to finalise agreement. It is important that the Presidencies work together to maintain progress in the work of the Council. I know we have built on the work of our colleagues from Cyprus and I hope that Lithuania can benefit from our work.
The lessons learned from the recent economic, financial and sovereign debt crisis have led to successive reforms of the EU’s rules, introducing among other things new surveillance systems for budgetary and economic policies. These are essential if we are to maintain a functioning eurozone.
We have seen the introduction of better rules with headline deficit and debt limits, a stronger focus on debt, a fiscal pact for participating member states and greater flexibility in a crisis. There is now better enforcement of the rules and this is important. Thus member states are judged on how they can meet their medium term targets, the use of early warning systems and compliance with the terms of the Stability and Growth Pact. There is greater monitoring of economic policies under the European semester and the six pack procedures.
The achievement of the Presidency under the heading of economic governance was to get agreement on the two pack – this introduces budgetary coordination in the euro area and allows for economic surveillance to be stepped up for euro member states with high deficits or debts and those facing difficulties with regard to their financial stability. The two pack is in force since May.
The main change that we will all see in Ireland is the move of the budget to October. This is an important change in the way in which we manage our finances and the finances of the eurozone.
The European semester process is critical to ensure member states discuss their budgetary and economic plans with EU partners at specific times during the year. During our Presidency, we helped put in place a road map last December to make the process operate more smoothly. Positive feedback from ECOFIN colleagues following the conclusion of the 2013 semester indicates that we have achieved a successful outcome in terms of the economic governance of the Union.
At the January ECOFIN Council we achieved agreement which will allow those member states who wish to proceed to the next stage of introducing the financial transaction tax to so do under the enhanced co-operation procedure. This was the first tax proposal to be dealt with under the enhanced co-operation procedure. As Presidency we have facilitated discussions and ensured that anyone who wished to participate in the discussion could be heard, irrespective of whether the member state was participating in the financial transaction tax.
We have achieved more in taxation than we may have reasonably expected to. The Presidency has been active in promoting anti-fraud and anti-evasion measures in the ECOFIN Council. On 24 April, the Commissioner for Taxation Algirdas Šemeta and I wrote to all EU Finance Ministers about the fight against fraud and tax evasion setting out a series of measures to facilitate the automatic exchange of information between jurisdictions that could be adopted by the Council.
There has been agreement on the mandate to allow the Commission to commence negotiations with third countries on updating savings taxation agreements. We achieved agreement on Council conclusions to prevent tax evasion and fraud and at the June ECOFIN meeting we achieved agreement on the VAT quick reaction mechanism, or QRM, and the reverse charge mechanism, RCM which together underpinned a comprehensive VAT anti-fraud package proposed by the Irish Presidency. We have worked also to get agreement on the 2013 budget.
We secured a very substantial amending budget for the European Union, which is unprecedented this early in the annual budgetary cycle. This was a key element in the overall delivery of a political agreement on the multi-annual financial framework between Council and Parliament.
I understand Deputy Donnelly must be in the Chamber at 4.30 p.m. With the agreement of other members, we will allow the Deputy to contribute first before resuming with the normal running order.
I thank the Chairman and Deputy Michael McGrath for allowing me to speak first.
As a member of the Opposition, I am either detached or semi-detached from the Irish Presidency, but it appears the Minister and his officials did an excellent job during the Presidency, even if one or two things did not go exactly as they may have hoped. The Minister, in particular, has been operating in a highly constrained environment in ECOFIN given the domestic politics at play in Germany, where a general election is imminent. I heard repeatedly from officials in Brussels that the Minister and his officials did a great job. Those with whom I spoke were very impressed with the Irish team at a political and an official level. I wish to acknowledge this publicly.
On the bank resolution mechanism, the technical note from the European Union is dense and complicated. I ask the Minister to request that his officials prepare for the joint committee a note explaining exactly how a resolution would proceed. Phase one involves a bail-in of 8%, phase two involves a 5% bail-in, and so forth. It would be useful if the Department provided one or two worked examples of a theoretical bank entering a resolution process, as it would help us to understand this complicated mechanism.
Before the most recent ECOFIN meeting, I understand the Minister's position was that he would seek to have small depositors take precedence over senior bondholders. I agree with that position, although the Minister will have to forgive me if I understood his position incorrectly. I was not able to figure out from the technical note whether this objective was achieved. Was it achieved, or will normal depositors and senior bondholders continue to be placed on an equal legal footing?
I thank Deputy Donnelly for the good wishes and congratulations he extended to me and my officials, who are well worthy of the congratulations they received both here and in Brussels.
The bank resolution mechanism is complex because it is a new concept and new terms are being used. I will ask my officials to provide the Deputy with a user-friendly paper which breaks down the various ideas. I will try to simplify the process and perhaps it should be considered in the following manner. The Deputy will remember the concept of an institution being "too big to fail". The reason this concept was in the public consciousness, especially in the United States, was that a bank was considered to be too big to fail when its failure would bring down the sovereign. The opening position is that banks may no longer be too big to fail, which means not every bank that goes bust must be resolved. Instead of calling on taxpayers to bail out banks, the assets of the impaired bank will be used as a bail-in mechanism to liquify the assets to repair the hole in the bank in question. That is the general principle.
In proceeding with a bail-in mechanism, the assets covered by the bail-in are placed in a hierarchy, starting with the equity, followed by junior bondholders and, thereafter, senior bondholders. A guarantee will apply to deposits of up to €100,000, which will be sacrosanct and, therefore, exempt from the bail-in, and preference will be given to other depositors.
To distinguish between exemption and preference, up to €100,000 is guaranteed and exempt and preference would apply to individuals with deposits over €100,000 which would have preference, for example, over corporate deposits. The idea is that preference would be given to what, in law, is called "natural persons" with deposits over €100,000, that preference would also be given to SMEs with money on deposit and that the first line of deposits would be the corporate deposits of large corporations with large holdings. That is the way it runs on the deposit side.
Will SMEs and normal depositors with amounts over €100,000 have preference over senior bondholders or will they still rank the same as senior bondholders?
They will. The legal link and the pari passu link between senior bondholders and depositors has been broken and all deposits will move to a lower level in the hierarchy of bail-in assets, as we discussed previously, but within that hierarchy the position has been nuanced and refined more and a differentiation has been made between natural persons with big deposits, over €100,000, and SMEs as against corporations. We can get the paper that has been requested.
In regard to the figures of 8%, 5% and so on, if a bank is bust and needs a rescue and cannot manage without help, there is a resolution authority which organises the bail-in. If the level of impairment is 8% of its balance sheet, all of the rescue will be by bail-in. If the level of impairment exceeds 8% of its balance sheet, it will move to the next phase, the next 5% of its balance sheet; an amount equivalent to the next 5% of its balance sheet can be accessed elsewhere - a resolution fund the sovereign might have or the ESM. In a very bad situation such as in the case of AIB, where the level of impairment exceeds 8%, plus 10%, and there is still a level of impairment beyond 13% of its balance sheet, it again goes back to a bail-in and the resolution authority might return to the senior bondholders for an additional haircut or the ESM could be directly accessed at that point. In the first phase, in the case of the figure of 5%, there would be indirect involvement by the ESM because the sovereign would have to apply. However, for the tranche beyond the figure of 13%, if such a case arises in extremis, the application could be made by the institution directly to the ESM if it required recapitalisation. That is the general position. I am explaining it very simply, but we will get a paper for the Deputy which is not quite as simple but not as complex as a technical paper.
Perhaps with a worked out example to show how it works
The Deputy can work the examples. I again thank him for his complimentary remarks.
I thank Deputy Stephen S. Donnelly. Mindful of the fact that the Minister needs to leave by 5.10 p.m., I propose that the first round of questions involving the main Opposition parties be ten minutes. I can come back to members later if the need arises.
I, too, compliment the Minister; the Minister of State, Deputy Brian Hayes, and their officials on their work at ECOFIN. I am aware that it has required much personal commitment in the past six months and in the period leading up to the start of the Presidency. I acknowledge all of the hard work done and the progress made on a number of important fronts.
Deputy Stephen S. Donnelly raised the point on which I was about to start concerning the common resolution framework which the Minister has explained. In respect of deposits above €100,000, the Minister has explained that there are layers beyond this amount. Will he clarify the relationship between the different layers of deposits over €100,000 and senior bondholders? Is it the case that the senior bondholders would take a hit first in all cases and only after this has been exhausted that any depositor would be involved in burden sharing? An explanation would be helpful in that regard. Will the Minister clarify if senior bondholders would take the hit first before any deposit over €100,000 would be affected?
The hierarchy is equity, subordinate bondholders and senior bondholders. If one has to go further for additional assets, one goes to the depositors, for whom €100,000 is guaranteed. On the same line preference is given to larger deposits of natural persons and SMEs. What is part of the bail-in at that point is corporate deposits.
That is fine. Will senior bondholders take the hit first?
That is an important development and to be welcomed. I compliment the Minister on getting it in place. I understand it will be 2018 before the bail-in procedures are fully applied. Will they apply in the case of banks that fail and also banks that require capital if there is a capital adequacy issue?
Both. Often in the European Union, once a mechanism is put in place, it can be used informally. If bail-in becomes the new rule, it will be very hard for a Government to go back to a set of taxpayers and say it wants their money to bail out an institute. I do not think countries will have the legal arrangements in place and everything will be done until about 2016. There will be a gap between 2016 and 2018.
Will it require the introduction of domestic legislation in every country?
We have our own resolution legislation, but, yes, there will be domestic legislation also. It will be transposed from the EU directive.
That is fine. It clarifies also the potential role of the ESM, depending on the scale of the issue within a bank, whether it is beyond the threshold figure of 8%.
It builds in to the directive the manner in which the ESM can be accessed. One must think of the European Union. There are 18 countries in the eurozone. The countries that are not in it have banking systems that lend and borrow in the eurozone and right across the European Union. There are banks that work only in their own sovereign area, banks that work in the eurozone and banks that work in the eurozone and the countries outside it. A common set of rules is needed for the 27 member states and it has to work across all of them. Given that some are not using the currency, they have their own mechanisms for resolving bank issues. They had large resolution funds, for example, in Sweden. We had to vote on the issue of flexibility to allow for countries such as Sweden and the United Kingdom to ensure a harmonised system for the 27 member states and also an element of flexibility that would apply to all but where the original demand came from those that were out rather than in.
Perhaps I can move to the single European banking supervisor. I listened carefully to the Minister's comments when he said it would relate to all major or systematically important banks and that there would be differentiation, depending on the size and significance of the banks involved. Will he translate for us what it will mean in Ireland's case in respect of the direct regulation of the pillar banks, for example, Permanent TSB, and other institutions? Will they all be categorised as being systemically important and falling under ECB regulation when it is fully up and running?
There will be a common rule book and common protocols which, in the first instance, will be directed from Frankfurt. There will be a common set of rules and protocols which, in terms of regulation, will apply to all banks. Some banks will be regulated by the domestic regulator, while others will be regulated directly by the European regulator. If I recall it correctly - I will check with my officials - every country must have a minimum of three major banks under direct regulation. In the case of Ireland, that means the main banks will be directly regulated.
Under the regulations.
In a country such as Germany obviously there will be a minimum of three big international banks, but it will go beyond this.
A domestic regulator will do the work locally in the German lender, but those banks will be subject to the same or common rule book that applies to everybody.
Will certain functions be delegated to the domestic central bank, such as site visits, inspections and that kind of work?
All functions not within category 1 will be delegated to the domestic regulatory authorities, but they will have to regulate by the same set of rules and protocols. Also, a fail-safe mechanism provides that if the authorities in Frankfurt are worried at any point about a particular bank, they can override the domestic regulator and come in and take direct control of the regulation.
Here, the pillar banks will be in category 1. Therefore, all direct contact between those banks and their regulator will be with the ECB directly. Is that the thrust of it?
The three main banks in all countries will be directly supervised, but the ECB will obviously build a relationship with local banks also. How it will recruit and where it will establish the regulatory personnel are not clear. We do not know whether people will fly in from Frankfurt or whether a cohort of people will be housed in our Central Bank. I am not sure how the logistics will work, but I am providing the legal theory of what will happen.
What are the consequences of this for our Central Bank? Clearly, it will still have a role in regard to non-category 1 regulated entities. What are the implications in terms of the resources that will be needed? Staff currently involved in regulating the pillar banks will no longer be doing that for the Central Bank. Is there a strategy involved?
The authorities in Frankfurt can supervise through the local central banks, but the authorities will have the legal mandate and will direct how it should be done. They have the freedom to use local personnel when doing local regulatory work. However, the local personnel will not be the regulator.
They may do the work as an agent of the ECB.
The Minister mentioned in his contribution that he hopes the deposit guarantee scheme will be agreed at European level. What changes are proposed in that regard? Does this mean, for example, that the €100,000 figure guaranteed here will be the standard across Europe? Will it be a standard figure and will the agreement have an impact on the deposit protection account the Central Bank currently holds? What are the key changes proposed for a common deposit insurance scheme?
From the depositor point of view, we hope there will be no changes, because the €100,000 would be sacrosanct. It is sacrosanct here already, so this would mean no change. What would be organised in Europe is how this will be underpinned financially. We are talking about the size of the European fund underpinning the guarantee and the level of contribution from the financial institutions. The idea is that it would be financed by the industry. However, the mechanics of that have not yet been worked out. The next paper to come forward will deal with the mechanics of the fund underpinning the guarantee and how it will work and whether there will be some element of insurance in it or whether it will be a large fund contributed to by the industry. If there is a loss in a particular institution, it will have to be made good in full out of the fund for depositors with up to €100,000.
Currently, there is more than €300 million in the deposit protection account with the Central Bank. If the banking system collapsed tomorrow morning, that would not go anywhere near meeting the requirements of the insured deposits of up to €100,000. Will there be an insurance element which will involve third parties?
The detail has not been worked out yet. We have dealt with the CRD IV, which concerns the capital requirements and the matter of bankers' bonuses, which is attached to that. All of the work regarding supervision is now completed and we have the detail of that. The resolution directive is completed and we have the detail on that. Then, in principle, there is an agreement that there will be a fund underpinning the guarantee on deposits, either to replace or to add to domestic funds. The full logistics of that have yet to be worked out. The bottom line currently is that the €300 million in the Central Bank is underpinned by a State guarantee. Therefore, the guarantee is not limited to the amount that is in the fund. As I understand, that will be transferred to European level. We will have a banking union regulated centrally and separate from the sovereign bank. Therefore, the underpinning of deposits will be separate from the sovereign banks also.
At present, that liability would run into tens of billions of euro. My final question relates to the budget process here. The Minister referred to the changes brought about by the two-pack agreement in Europe and our budget has been brought forward to 15 October. What is the role of the European authorities in regard to that budget? For example, is the Minister required to submit a draft of the budget to the European Commission in advance of our budget? What are the two-pack requirements which must be met in the lead-up to the delivery of the budget in the House in October?
The draft is required in mid-October. I will explain the terminology in a moment. If we stuck to our traditional date, we would have to bring much of the detail of the budget out in draft form in October and then enact it. Therefore, it is much easier from our point of view to bring the budget forward to October. What Europe means by a draft is what we would normally do in December. It does not regard the full budgetary process as complete until the Finance Bill is enacted at the end of March. Therefore, its idea of a draft is not I would call a draft. The draft is the budget as presented on budget day. Then enactment completes the process. We will bring what Europe calls the draft forward from approximately 7 December to 15 October. We will then have some consultation with Europe and we will supply it with the budget. We will try to introduce the Finance Bill in the same calendar year. For those who are planning an autumn break on the snow slopes, they should expect the Finance Bill sometime between the budget and Christmas.
Thank you.
I am not sure whether too many people will be able to afford an autumn break. Hopefully, that was a hint that the Minister is going to ease up on austerity.
You have to celebrate your second All-Ireland win.
True. That takes me back to the time the Minister said I was like the Donegal team, all defenders. Look what we did a year later, so just watch out.
Some of the questions I want to raise have been touched on already. In regard to the supervision of the major and systemically important banks, the Minister mentioned there is a minimum requirement of three in each member state. For clarity, which three banks here will be supervised and regulated by the ECB, and will it be only three? Three is a minimum requirement, but I presume it can go beyond that.
The criteria have yet to be established, but it seems evident that AIB and Bank of Ireland will be the two. There could be a number of bids on the table in regard to the third. In regard to Ulster Bank, for example, the Bank of England is its regulator.
We regulate Ulster Bank in regard to its operations here. It has over 1 million customers here. Is it a minimum of three banks?
It is a minimum of three for each member state.
Is it for the Minister for Finance to determine which the third bank will be or whether there should be a fourth?
The relationship will principally be between the Central Bank and Frankfurt.
There is no clarification on the third bank here, but there will be a third one.
The ECB will set down the criteria.
Okay, and it will base its choice on whether the banks selected are major banks or systemically important to the Irish economy. The Minister mentioned the bail-in and Deputy Donnelly also touched on that. Will the Minister tell us what effect the bail-in will have on pillar banks in which we have a shareholding - for example, AIB, which we nearly own completely, or Bank of Ireland? How will the bail-in affect our shareholdings, which are currently valued at approximately €8 billion or €9 billion?
Our resolution has effectively been completed, and our banks are well capitalised. We do not envisage a bail-in coming on top of a bailout. We had a bailout and that is why we have the shares in the banks. This is for future cases when the policy has moved from bailouts, to which we all objected for a long time, to a bail-in system. Many people talked about burning bondholders during the election, and that is effectively what is happening now. The policy positions that the Deputy's party and my party and the Labour Party were advocating in opposition are the policies that are now in the resolution.
I noted the Minister's speech today about the lessons that have been learned, and I welcome the fact that the burning of bondholders is now accepted as the norm in the future. We are not suggesting at this point that the banks may need more capital, because we do not have the evidence, but there are stress tests and the troika are even insisting that we test this before they bid us farewell. I take the Minister's point that his view is that the banks are well capitalised, but if it transpired that one of the banks needed additional capital under the bail-in rules, would it be our shareholdings that would take the first hit?
If one of our banks needed additional capital, the first option would be to raise it on the markets. That would be the obvious option to take. After that, an application to the ESM would be the next option. It is hypothetical.
There are four of us and we can compare with one another and then conclude the session, if that is agreeable.
I am happy with that. There is a bail-in procedure here. My understanding is that we could not go to the ESM without applying the bail-in procedure. Is it not the case that in a bail-in procedure, the first to take the hit are the shareholders, followed by junior bondholders?
The Deputy is mixing up two questions. He is talking about a bail-in for one of the Irish banks and then talking about one of the Irish banks requiring extra capital. I am answering the second part of his question. If an Irish bank requires extra capital, the first recourse would be to the markets and the second recourse would be to the ESM. One would not regard it as an insolvent bank, but a bank that needed additional capital in the estimate of the ECB. Having rescued the banks and with constant monitoring from the Central Bank of Ireland, the Regulator and the ECB, I do not envisage a bail-in situation arising. An extra capital situation might arise.
Is the Minister saying that in respect of the ESM direct bank recapitalisation instrument, we would not have to follow the bail-in procedure before we were able to get access to funding from the ESM?
What I am saying is that one must distinguish between resolution and recapitalisation. While there may be a hypothetical requirement for recapitalisation of Irish banks, especially when we move towards the end of the decade and the Basel III rules come in, I do not envisage any situation in which a resolution issue would arise again with the Irish banks.
I am not envisaging a resolution issue either, but a recapitalisation issue. Under this instrument, the first people to take a hit before we could even get access to the ESM would be the shareholders. Is that not correct? Am I reading this wrong?
No, that is for resolution. That is the sequence for resolution. As the bank gets resolved, its capital would have to be built up as well. One could have a bank needing capital - quite clearly, many of them will need capital, and this will be apparent next year - without any threat of resolution. They will just need additional capital. It has happened before. A bank would be given 18 months or two years to come up with a plan to put capital in place. Some would go to the market, which would be the obvious way to do it. The shareholder would come in; the bank would do an issuance and would try to collect extra capital from its shareholders, who would buy extra shares.
Just to be clear, if one of our banks required additional capital after stress tests were carried out next year, and it could not raise it in the international markets, it would have access to the ESM and this bail-in procedure would not apply.
The Deputy is talking us into a situation. He is making it sound as if the Irish banks will need capital next year. They do not.
I just-----
The trouble is that when one keeps repeating a hypothesis, it suddenly becomes a reality. There is no evidence whatsoever that any of the Irish banks will need additional capital next year. What is certain is that there will be stress testing next year, but the Irish banks are very well capitalised. I have no evidence at present that they require any additional capital.
I have no evidence at this stage either, but I just want to know if I am hearing this correctly. If the banks needed additional capital, would they able to go to the ESM for that capital, and is it the case that the bail-in procedures would not apply?
The Deputy is again mixing up resolution and recapitalisation. I outlined the resolution mechanism, and he has transferred that to recapitalisation, which is a different concept.
I asked earlier if all of this applied to both failing banks and banks needing capital, and the Minister said that it did.
What I intended to say was that at a certain point in the process, when the bank is resolved, the issue would arise as to how much capital it has and how much capital it would require. We then work on that basis.
The Minister can clarify this. It may not happen and it hopefully will not happen, but if it did happen, could we get access to the ESM? We were sold this so strongly. There was no reluctance on the part of the Minister during the Lisbon treaty referendum to tell us that we had that lifeline in the ESM. If a bank needs further capital - I am not mixing this up - sometime next year, do we have access to the ESM before we apply for a bail-in, or do we have to apply the bail-in procedure first?
When the ESM is fully in place, part of its mandate is to provide capital to banks that require capital.
Before or after we apply a bail-in?
The Deputy has gone across the line again.
Jesus Christ, Minister - just answer the question.
The Deputy is mixing up recapitalisation and resolution. He is trying to construct a theory on a false premise. I have done my best to explain it to him.
The answer is a very simple "Yes" or "No".
No, it is not. There are very few questions that can be answered with "Yes" or "No", and bank resolution questions certainly cannot be answered like that when the question is being put by the Deputy.
Can a bank get capital through the ESM without the requirement for a bail-in, if it cannot raise money on the international markets and needs capital? I am wasting my time on this simple question.
It may apply.
Bail-in rules will not be there for five years anyway.
It is one year last week since the major game changer, or the seismic shift, as it was called at the time. The Minister presided over five ECOFIN meetings during the Presidency. There is one important line at the end of the five-page statement on potential retroactive application of the instrument. It has to be by mutual agreement and it must be on a case-by-case basis. We know that this procedure will not come into effect for a few years. Does retroactive application date from the time we bailed out our banks in the past, or is it from the agreement today? In other words, if this procedure is not available, the ESM is not up and running. If a bank runs into trouble, then a retroactive application can apply because the principle has not been agreed. When does the date of retroactivity begin? Does it definitely apply to us? Is there an understanding behind this text that retroactive applications include the dates on which this State recapitalised our banks?
The Minister will understand my frustration one year on that we are still in a situation where not one penny of the money we have injected into the banks has been returned. Indeed, we have crystalised some of it with the sovereign bond with Anglo Irish Bank in terms of the capital, although I acknowledge the short-term benefits in terms of the interest. What is going on behind the scenes? Can the Minister shed any light in respect of the potential of this line? Is there more understanding at ECOFIN, the Eurogroup and ECB level of what this means for Ireland? Is it still on the cards to try to get perhaps not the existing value of the shareholdings in the bank, but the historic value of the shareholdings, or are we basically moving on to try to sell these shares on the international markets? We know that the chief executive of Allied Irish Banks has been setting up several meetings with potential bidders in the United States.
The seismic shift that Deputy Doherty referred to with a sarcastic tone has actually occurred, because the seismic shift was to break the vicious circle between the banks and the sovereigns. That was the seismic shift, as was the substituting of bailouts with bail-ins. We are bringing the resolution arrangements forward now, in consultation with the European Parliament. Eventually, they will be turned into a directive and have the force of law throughout the community. That is the seismic shift. The banking union will be like the banking union in the United States whereby the taxpayer will not be involved in bailouts. Instead, the assets of the banks will be used for bail-ins.
Deputy Doherty raised the retroactive question. It is retroactive from the time the ESM is in place and the detailed operational elements that are not settled yet will be settled. There is no commencement date. It is back before that time but there is no base date that prevents us from going back. I am working on the assumption that it applies to the Irish banks and it is on a case-by-case basis.
The Irish EU Presidency drove this and the Irish Minister for Finance ensured that this is in the regulations. Everyone knows the intention. How it will work in practice? I am approaching it like I approached the promissory note negotiations. I am opening up a new negotiation and it will be long and slow. We will move carefully to get the best result for Irish taxpayers. Working on a case-by-case basis suits us. The committee will recall the statements made by Chancellor Angela Merkel and President Hollande stressing the uniqueness of the Irish case, Ireland being a special case and so on. That is why we work on a case-by-case basis.
If I was to promulgate a negotiation that applied equally to Greece, Portugal and Spain as well as Ireland, we would not get beyond first base. The only way was to position this as a unique solution for Ireland because we were not allowed to bail-in the bondholders. The European Central Bank prevented us from doing that. According to the bank, it would have had a contagion effect in Europe. If we participated in preventing the contagion from spreading to the European banking system, then we have a case on which to build. Anyway, all these things are slow and must be carefully built. We will see how we go, but we are in the game all the time.
I congratulate the Minister on his work during the Irish Presidency. I am fascinated with the Minister's concept that we will pay ourselves and, therefore, I will be brief. My question relates to the tier 1 status and the top three countries which have access to the ESM. Will that be pan-European? Will Ulster Bank, ACC Bank and Rabobank, all of which have depositors in Ireland, be covered under the national country rules? Will the depositors of the Ulster Bank parent company in the United Kingdom have the same rules applied as the Ulster Bank depositors here?
Yes, the same rules will apply throughout Europe when the rules are put in place. At present, Ulster Bank is a subsidiary of a bank that is regulated by the Bank of England. However, when we have a banking union the guarantees will be there and there will be a fund to guarantee them. We are unsure yet about how that will relate to the individual sovereign funds.
Is there any fear that there may be a competitive pressure on smaller banks, in other words, that there might be a flight of capital to the tier 1 banks generally and that this could be anti-competitive for smaller banks? Will people take the view that deposits will be safer in the bigger protected banks?
We have the same banking system throughout Europe and it is controlled and protected by the European Central Bank. The only difference that can arise is on the cost bases of the banks, because the interest rates are fixed at European level. It is up to the banks in the individual countries to fix their cost bases. We hope for a common banking system whereby the price of money throughout the Union would be the same, or within acceptable margins, rather than the position now whereby one can get ten-year German money for 1.50% or 1.60% while ten-year Portuguese money was 8% last night.
I will bring the meeting to a conclusion. I wish to add my own congratulations to the Minister. I commend you, Minister, and your officials on what was a very taxing six months - excuse the pun - for you and the Department. Well done on stepping up to the plate. You have shown once again that Ireland can be a leader and most effective during the term of the EU Presidency. I thank you and your officials for coming before the committee this afternoon.
I want to come in for a moment.
It will only be a moment. You have two minutes. I am finishing at 5.10. p.m. If you want the Minister to respond, you must give him time to respond.
I have two questions for the Minister. One is broad and the other is specific.
Across the early phases of the banking union that the Minister has described, is it not likely that we could face the risk of real fragmentation within the European banking system? Let us consider what has occurred in the sovereign debt markets. For a while, the financial markets lent to countries as if no country could go bust. Ireland and Germany got money at the same rate as Greece. However, we are now going to be in a position whereby explicitly there will be a risk that banks can go bust and we will have a way of dealing with it. Financial markets will lend to banks pricing in that risk and one bank will lend to another bank pricing in that risk. Will we not face real pressure on the banking system during that period?
My second question is specific. A constituent who heard about the proposal on the radio put it to me that his family has all its money in a single joint bank account. It amounts to a little over €100,000. If a bank was to go under, then, in the context of a joint or family bank account, what is the bail-in risk that a joint account would face, as opposed to the account of an individual?
I will address the fragmentation risk first. The European banking system is rather fragmented at present. I have just remarked on the different price of money in the different jurisdictions as represented by ten-year bond prices, for example, and that shows the level of fragmentation. We are trying to create a banking union with one set of supervision rules, resolution rules and deposit guarantee rules such that we remove the fragmentation. The process will be towards a unitary banking system rather like the United States. There will still be some variation depending on the cost bases of the banks. Of course people will price in risk when they are dealing with banks and the banks will price in risk when they are dealing with customers, but that is normal banking. I am suggesting that as it develops, as the European authorities insist that banks are absolutely adequately capitalised and as they carry out stress tests to measure the level of capitalisation - they will carry out stress tests again next year universally throughout Europe - the fragmentation will be taken out and, therefore, one of the primary purposes of the banking union will be achieved.
In respect of the level of guarantees, the domestic situation is that deposits up to €100,000 are guaranteed in the one bank. If the Deputy has any doubts and is advising a constituent, he should tell them that if their money is not with Bank of Ireland, they are entitled to be guaranteed for another €100,000 in AIB. This does not happen branch by branch. There is no point in swapping into a second Bank of Ireland branch. One needs to go to the other institution. That might be a practical solution for that.
I have already given them that advice but I can go back and tell them that it has been endorsed by the Minister for Finance.
The Deputy can say he has a friend who told him this might be a good idea.
On that note, I think Deputy Donohoe is advised to spread his money over four or five institutions this afternoon.
I should make it clear that I do not have enough myself to get to that point. A single bank does me nicely.
The guarantee more than covers him, like myself
Absolutely.
All their friends have €100,000.
A single constituent came to me.
I thank the Minister and his officials for briefing us this afternoon. I understand there are a number of Council meetings in the next session when we resume and I look forward to seeing the Minister then. I do not believe there is any other business so I propose that the meeting be adjourned sine die. Is that agreed? Agreed.
The joint committee adjourned at 5.10 p.m. until 2 p.m. on Wednesday, 10 July 2013.