Joint Committee on Finance, Public Expenditure and Reform debate -
Wednesday, 10 Jun 2015

Single Resolution Fund Bill: Discussion

Chairman

I remind members, delegates and those in the Visitors Gallery to ensure their mobile phones are switched off. This is important because it causes serious problems for broadcasting, editorial and sound staff.

No. 8 is pre-legislative scrutiny of the general scheme of a Bill to provide for functions for the Minister for Finance and powers to spend regarding the agreement on the transfer and mutualisation of contributions to the Single Resolution Fund. From the Department of Finance I welcome Mr. Aidan Carrigan, assistant secretary, and Mr. Cathal Sheridan. The departmental officials are accompanied by an official from the Central Bank of Ireland should clarification be required. The format of the meeting is that Mr. Carrigan will make some opening remarks which will be followed by a question and answer session to clarify matters.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable.

I invite Mr. Carrigan to make his opening remarks.

Mr. Aidan Carrigan

I thank the joint committee for inviting the Department of Finance to discuss the draft heads of the Bill, the purpose of which is to enable ratification by Ireland of the intergovernmental agreement on the single resolution mechanism, SRM. The legislation is required to put the State in a position where its domestic law will be able to give full effect to the State's obligations under the intergovernmental agreement on the single resolution mechanism, thereby enabling Ireland to proceed to ratify the agreement.

The Bill is short. The core points are it is to provide for the functions of the Minister and the power to spend. These are the only aspects of the intergovernmental agreement that need to be dealt with in the draft legislation. The remaining commitments in the agreement are binding on the State and do not, therefore, require domestic legislation to give effect to them. Ratification of the intergovernmental agreement needs to be completed by the end of November at the latest to ensure the single resolution mechanism can become fully operational from 1 January 2016.

The purpose of the single resolution mechanism is to provide within a banking union context for a centralised resolution system which will be applied in a uniform fashion across all participating member states. The single resolution mechanism is the second pillar of banking union and will ensure that if a bank subject to the single supervisory mechanism, were to face serious difficulties, their resolution could be managed efficiently at minimal cost to taxpayers and the real economy through a single resolution board and a single resolution fund financed by the banking sector. What this means in practice is that should any of our three major banks get into financial trouble, the decision about putting it into resolution will be made by the single resolution board, rather than the domestic resolution authority. In addition, access to funds from the single resolution fund will facilitate the use of any of the resolution tools in respect of the national banks.

The single resolution mechanism complements the process of harmonisation which commenced with the development of the single rule book for banks in the field of prudential supervision and the development and implementation of the single supervisory mechanism, under which significant banks are now supervised directly by the ECB. It is an EU regulation and has direct effect. It applies to euro member states and any non-euro member state which is admitted after appropriate due process is followed. To date, no non-euro member states have signed up to the single resolution mechanism. The United Kingdom and Sweden, in particular, have indicated that they have no interest in joining, whereas Denmark seems to be more positively disposed to it.

The target level for the single resolution fund is at least 1% of the amount of covered deposits of all credit institutions authorised in all of the participating member states and is to be reached at the end of eight years. The figure is estimated to be in the region of €55 billion. We estimate that the contribution of Irish banks to the single resolution mechanism will be €1.8 billion to be paid over the eight years, which amounts to in the region of €225 million a year. The banks’ annual contributions will be calculated on the basis of their liabilities, excluding own funds and covered deposits, and adjusted for risk. The contributions paid will be a normal operating expense for banks, including State-owned banks.

The intergovernmental agreement was negotiated to enable the single resolution fund – a key element of the single resolution mechanism – to be operationalised. It was signed on 21 May 2014. A Government decision on 13 May 2014 approved this course of action. It covers the member states who are participating in the banking union and also provides that where the single resolution board is, for instance, successfully sued for damages, non-participating members will be appropriately compensated. The reason this needs to be addressed is that in such circumstances, the damages in question could only be paid from the overall EU budget rather than by the actual participating member states of the banking union.

The intergovernmental agreement will facilitate a gradual mutualisation of the single resolution fund over an eight year transitional period. It will do this through the creation of national compartments within the single resolution fund into which member states will transfer the contributions collected from their banking sectors. In practice what this means is that should a bank be put into resolution and recourse to single resolution fund moneys be needed to facilitate the resolution, the next step will be the provision of funding from the national compartment of the affected member state. After this, where additional single resolution fund moneys are needed, funds will then be obtained from the other national compartments. At the end of the eight year transitional period the single resolution fund will be fully mutualised, in other words, we will have a common pool from which funding will be drawn for the purpose of financing resolution actions, no matter where they happen within the banking union.

In summary, the main purpose of the intergovernmental agreement is: (i) to transfer the contributions raised at national level in accordance with the bank resolution and recovery directive and the single resolution mechanism regulation to the single resolution fund; (ii) to allocate during the eight year transition period the contributions raised at national level to different compartments in the single resolution fund corresponding to each participating member state; (iii) to facilitate the progressive mutualisation of these compartments in such a manner that they will cease to exist at the end of the transitional period; and (iv) to prescribe how the single resolution fund can be applied during the transition period. These changes could not be accommodated within the single resolution mechanism regulation because a number of member states argued that Article 114 of the Treaty on the Functioning of the European Union did not provide an appropriate legal basis to collect funds nationally and transfer them to a European fund. Consequently, it was agreed at the European Council that this issue should be dealt with through an intergovernmental agreement which could be formally ratified in accordance with national legal requirements in due time to permit the single resolution mechanism to become fully operational by 1 January 2016.

As the intergovernmental agreement was adopted intergovernmentally, it is necessary for each participating state to ratify the agreement, while at the same time ensuring it has the necessary domestic legislation in place to enable it to give full effect to its obligations under the agreement. In an Irish context, therefore, to give full effect to its obligations, there is a need for primary legislation as it is an agreement made outside the legal framework of the EU treaties and cannot be directly transposed. The Bill is short and the core points are to provide for the functions of the Minister and the power to spend. These are all that need to be dealt with in the draft legislation. The remaining commitments in the agreement are binding on the State and do not, therefore, require domestic legislation to give effect to them. Any cost to the Exchequer arising from the proposal is likely to be minimal. In this regard, it should be noted that the cost to the banks, including those owned by the State, will be borne by the banks and will not impact on the Exchequer. It will be a normal cost in conducting business for all banks across the banking union.

This is a small but very important piece of legislation which will enable Ireland to ratify the intergovernmental agreement on the single resolution mechanism which, in turn, if also ratified by other member states, will allow for the operation of the single resolution mechanism from 1 January 2016. I am happy to take questions and provide clarification to assist the committee.

Deputy Tom Barry

Mr. Carrigan mentioned that the banks would have to contribute towards the fund. Will the level of contribution vary for each bank? Is the total Irish contribution to the single resolution mechanism fund €225 million?

Mr. Aidan Carrigan

It is in the region of €225 a year. The banks are already paying into a national resolution fund. Instead of paying into the national resolution fund, they will pay €225 million into the European resolution mechanism fund.

Deputy Tom Barry

How is the level of contribution of each bank decided?

Mr. Aidan Carrigan

There is a formula.

Deputy Tom Barry

Will the formula being applied continue be used or will there be new criteria?

Mr. Aidan Carrigan

Contributions to the national resolution fund are capped at a percentage of national deposits, with variations. In the European context, they will be capped at European level. The national cut-off point will not apply. It will be somewhat more expensive.

Deputy Tom Barry

Is Mr. Carrigan able to tell the committee what the figures are?

Mr. Aidan Carrigan

The banks contribute €84 million under the national bank resolution mechanism, but this will increase to €225 million under the single resolution mechanism.

Deputy Tom Barry

Is that a one-off cost or an annual contribution?

Mr. Aidan Carrigan

It is an annual cost, while the fund builds up over eight years to a total fund of €55 billion which includes €1.8 billion of Irish money.

Deputy Tom Barry

It is 1% of deposits. Will it be a moving figure? Could it become a constant charge after eight years?

Mr. Aidan Carrigan

No, it is only to build up the fund. It has been determined that the appropriate level of the fund is €55 billion.

Deputy Tom Barry

If it is to stay at 1% of deposits, if they increase, the fund will have to increase, otherwise it would become a lower percentage of deposits.

Mr. Aidan Carrigan

The figure of €55 billion is an estimate of what 1% of deposits will be. The amount of 1% will be fixed.

Deputy Tom Barry

Therefore, if there is not enough in the fund, we might have to continue to make contributions.

Mr. Aidan Carrigan

If there is a drawdown on the fund, it will have to be recouped from the banks through additional contributions to build the fund back up and maintain it at €55 billion.

Deputy Tom Barry

Does Mr. Carrigan see it becoming an additional cost to the regular citizen, given that the banks will have to earn it?

Mr. Aidan Carrigan

We do not see it as a hugely significant-----

Deputy Tom Barry

It is a threefold increase.

Mr. Aidan Carrigan

It is. However, we have consulted the banks and they believe it will not have a very significant impact on their costs to the extent that it would have the kind of result about which the Deputy is talking.

Deputy Tom Barry

This is like insurance to cover any bank that will fail in the future and ensure taxpayers will not have to pay directly from any country. Who will decide whether a bank merits a bailout?

Mr. Aidan Carrigan

The single resolution regulation provides for this; it provides that where a bank supervisor - in most cases it will be the single European supervisor - determines that a bank is about to fail, it will notify the single resolution board to commence resolution proceedings. The board will have to take that notification and make its own assessment. It will be representative of each national resolution authority and make a final decision that a resolution action is required.

Deputy Tom Barry

Is it almost a type of credit insurance?

Mr. Aidan Carrigan

It is a fund available to deal with resolution cases. Having been involved in the discussions at a European level, I see it as a significant step forward, given that it is a mutual fund. The banks in Germany will pay into a fund and if a bank fails in Portugal, the Portuguese banking system will benefit from the resolution funds made up by the rest of Europe. That is why we refer to it as a mutual fund. The mutual element will be built up over a number of years. It is a change of direction.

Deputy Tom Barry

Is 1% sufficient? Would it have prevented the economic meltdown we have experienced had it been in place at the time?

Mr. Aidan Carrigan

There was considerable debate about the level at which the fund should be pitched. With any ex ante fund there is no point in having funds set aside for a systemic crisis because the figure would be too big. Therefore, one has to pitch at a certain level to deal with normal banking arrangements. The figure of €55 billion was chosen. The fund will be called on only after a bail-in has taken place. Under the resolution mechanism, the banks must bail in first through their equity holders and bondholders and work their way down to a certain level. Only then can the fund be called in. The view taken was that while €55 billion might not have been enough to deal with the systemic banking crisis of recent years, in most countries it would have been enough to have dealt with any other crisis.

Chairman

Was an impact regulatory analysis carried out of the impact of the legislation?

Mr. Aidan Carrigan

The legislation will have no direct impact on the intergovernmental agreement. However, a comprehensive impact assessment was made at European level of the single resolution mechanism. This is just technical legislation to facilitate an element of it happening.

Chairman

We will pay €1.8 billion, approximately 3.3% of the fund.

Mr. Cathal Sheridan

Yes, approximately €1.8 billion of €55 billion.

Chairman

It is approximately 3.3 % of the fund.

Mr. Cathal Sheridan

One must take into account the fact that many international banks operate in Ireland and this is reflected in the level of contributions we would pay. The three big domestic banks would probably pay less than 50% of the overall contribution on an annual basis, whether in the context of a bank recovery and resolution directive, BRRD, or a single resolution mechanism, SRM. Again, the figures have yet to be worked out exactly.

Chairman

Therefore, this is not a threefold increase, as Deputy Tom Barry suggested, but probably an increase of one and a half times for national banks.

Mr. Cathal Sheridan

Yes, for national banks.

Deputy Richard Boyd Barrett

On the face of it, this is a good idea to avoid the necessity for the people to bail out the banks again by getting the banks to put money aside each year and mutualise it across Europe such that there will be a fund to bail out any bank that fails, meaning that we will not be on the hook again. The principle is reasonable. Banking systems can collapse in big as well as small countries. In the event of a banking collapse in Germany, could Irish banks be put in a very difficult position as a consequence? If the fund were to be used up entirely to prop up banks in a big country, the money would have to be replenished, an extra call would have to be made on the banks here and, consequently, the costs would somehow find their way back to the customers of these banks. Is that correct? Such a situation would be far more difficult for us than the other way around because big countries could absorb this better than relatively small ones with relatively small banking systems.

Mr. Aidan Carrigan

The mutualisation element was debated at some length and there are benefits and costs associated with it. A European fund is available. This means that if bank issues are to be resolved in another country covered by the European fund, the fund will have to be replenished by banks in countries that are not subject to resolution. During the financial crisis it would have been to our benefit if all of the other European countries had been paying into a fund on which we could have drawn. In the future we will have the benefit of being able to draw on a European fund in, I hope, the unlikely event that it happens again. If a large, significant, systemically important bank in Germany or France were to be subject to resolution, there would be a bigger call; however, this is probably less likely to happen. It is mainly smaller banks that have had issues resolved. If it were to happen, all banks around Europe would contribute at the same percentage and annual rate.

It would not mean a systemic shock to banks in Ireland if a large bank in Germany were to be put into resolution. It would mean Irish banks would have to make the contributions to the fund they were already making.

Deputy Richard Boyd Barrett

I understand Mr. Carrigan's response. Is there any end to how much we would have to put in to replenish the fund if there was a systemic collapse, if the banks here were dragged down by a big collapse elsewhere in Europe? Would we have to keep pumping money in?

Mr. Aidan Carrigan

Banks are only able to draw on these funds in resolution and after a bail-in, which gives added protection to member states and banks in other countries.

Deputy Richard Boyd Barrett

I was going to ask about the bail-in. Will Mr. Carrigan answer my question directly?

Mr. Aidan Carrigan

Based on our experience of financial crises in other countries, the bail-in and the figure of €55 billion would have covered the vast majority of cases. It is most unlikely that a situation would arise which would take us beyond that figure. If further funds were required, under the rules the banks concerned would again be bailed in.

Deputy Richard Boyd Barrett

That is my point.

Mr. Aidan Carrigan

There is a commitment in the resolution agreement to develop a backstop arrangement where it goes beyond the ability of the fund and the bail-in, but the backstop does not have to be in place until the fund is fully established in eight years time.

Deputy Richard Boyd Barrett

From where will the backstop come?

Mr. Aidan Carrigan

It has not yet been decided. There is an obligation at European level to bring forward proposals for a backstop and to have it in place in eight years time, but the details are not available.

Deputy Richard Boyd Barrett

Theoretically, there could be no end to how much by which we would have to replenish the fund if the cost of the collapse in a particular part of the banking system was to far exceed the size of the fund and any bail-ins that preceded it. Potentially, we could have to keep replenishing the fund. Am I right? Mr. Carrigan might say that is unlikely to happen and that it tends to be the smaller banks that go bust, but I want to know if it is a possibility. I do not think a very big banking collapse is impossible to imagine. Is it possible that the money we put in is exhausted quickly and we are being asked for more and more? Is there any end to how much we might be asked to put in if the draw on the fund was big enough?

Mr. Aidan Carrigan

As the fund is replenished there is a limit to what banks can be asked to put in per year.

Deputy Richard Boyd Barrett

What is the order of the bail-in and the conditions around it?

Mr. Cathal Sheridan

Shareholders are bailed in first, followed by subordinated debt, then eligible liabilities - senior debt - derivatives and deposits. Covered deposits are protected and the deposit guarantee scheme could contribute on their behalf. The system has also been designed in such a way that deposits of over €100,000 for small firms, SMEs and individuals are given priority over senior debt in order that they will be bailed in last, if needed.

Deputy Richard Boyd Barrett

Can protected people under €100,000 be bailed in before this mechanism kicks in?

Mr. Cathal Sheridan

No. They are fully covered and excluded from the bail-in. An additional protection for those who have money over and above the €100,000 limit is that they will be bailed in after senior debt. They were previously at the same level, but now they will be bailed in afterwards. There is also a provision whereby certain liabilities can be excluded if there is a feeling it could cause contagion and compound the situation.

Deputy Richard Boyd Barrett

Who has to pay into the resolution fund here? Obviously, the pillar banks will pay, but will the credit unions or the English banks with subsidiaries here have to pay?

Mr. Cathal Sheridan

Credit unions are excluded, but all banks authorised here pay into the fund. They include all of the international banks which operate from Ireland.

Senator Aideen Hayden

This is part of a wider picture of bank supervision, bank resolution and the guarantee of deposits at European level. At the end of 2013, 24 of the 123 banks subjected to the stress tests fell below the capital requirements, including permanent tsb, following which it mended its hand. How many of the banks that failed those tests have managed to meet the level of capital required or has any of them still not reached that point?

Mr. Aidan Carrigan

I do not have that information with me, but I understand any bank which had a capital shortfall has taken action to correct it. I would have to double check to be certain.

Senator Aideen Hayden

I ask because in the three pillar scenario, in which we are trying to separate sovereign debt from bank debt and put in place a resolution mechanism, the quality of the mechanism will depend on the quality of the banks involved. I presume the fund only applies to those banks that have satisfied the stress tests in terms of meeting the capital requirements.

Mr. Aidan Carrigan

The resolution mechanism is not directly linked with the stress tests. It is triggered by a supervisor who will oversee the quality of the institutions on an ongoing basis. The second "R" in BRRD stands for "recovery". All national resolution authorities and the single resolution authority are drawing up recovery plans for these banks in advance such that if any difficulty arises, the first intervention will be a recovery. By the time we get to the resolution stage there will have already been regulatory intervention and correction to maintain the stability of the bank.

Senator Aideen Hayden

How stable is the European banking system? We were talking about whether €55 billion would cover it in the event of a euro collapse. Of the banks still failing in meeting the capital requirements, are any of them Greek? Given the recent comments by the Prime Minister, Mr. Tsipras, to the effect that a Greek exit would bring down the euro and cause contagion within the entire euro system, to what extent is the supervisory mechanism which would be a precursor to bailing anybody in or out satisfactorily in place? If Mr. Carrigan does not have that information with him, he can send it on after the meeting.

Mr. Aidan Carrigan

A capital requirements directive which was not in place before is now in place. It imposes capital requirements on banks and requires buffers to deal with various scenarios. The regulatory environment is now very different and all banks are required to meet the capital requirement directives in terms of levels of capital and capital buffers to deal with the situation to which the Senator referred.

Senator Aideen Hayden

What if they do not do this?

Mr. Aidan Carrigan

The supervisor will refer the matter to the resolution authority which will intervene with recovery measures.

Senator Aideen Hayden

That is a bit like saying my child is not performing at school, so I will bring him into the headmaster to have a good talk with him.

Mr. Aidan Carrigan

No, it is-----

Senator Aideen Hayden

Can we go a bit further than that? They are brought in for recovery. What happens if a bank does not recover? Have banks within the eurozone that are in the bad boy category been brought into the headmaster for recovery before moving up the food chain? Obviously, the restructuring fund is not yet in place. Where do we really stand? Deputy Boyd Barrett has raised an interesting point. We are not out of the woods yet at European level. I am trying to get Mr. Carrigan's opinion, as he appears before this committee today. What is the state of health of the European banks at the moment? Do we still have some bad boys in the class? Despite the nice charts we have on the steps and stairs and how it will all be euro-guided at the end of the day, is there still a risk? Where are we on that process? On a scale of one to ten, with ten being all 124 banks ticking all the boxes, where are we now in terms of the European banks?

Mr. Aidan Carrigan

As a representative of the Department of Finance in Ireland, I am not in a position to give the Senator that information. It is the job of certain European institutions to pull that information together. The European single resolution authority is tasked with ensuring resolution and recovery plans are drawn up for all its banks. The single supervisor mechanism is overseeing all of these banks. There is no indication that any banking crisis is looming. At the same time, the job of the supervisors is to carry out that kind of assessment. We will see whether we can find out what is the latest assessment.

Senator Aideen Hayden

Who pays for the recovery? If a supervisor goes in and decides that a recovery is needed, who pays for that?

Mr. Aidan Carrigan

The bank concerned-----

Senator Aideen Hayden

Is Mr. Carrigan referring to the bank that is in need of help?

Mr. Aidan Carrigan

Yes.

Senator Aideen Hayden

It pays with money it does not have.

Mr. Aidan Carrigan

Perhaps my colleague, Mr. Sheridan, will talk about the type of recovery.

Mr. Cathal Sheridan

Recovery planning takes place at a stage when the bank is not in serious trouble. If there is still hope and life in a bank that has got into a little difficulty, a recovery plan is put in place to try to ensure there is a plan of action to address that. The recovery plan is prepared for the bank itself. The resolution plan is prepared by the resolution authority, which goes in, looks at the bank and the obstacles to resolving its difficulties satisfactorily, gets the bank to address those obstacles and ultimately satisfies itself that the bank is alive and well and has put everything in place to ensure a worst-case scenario can be addressed if it arises. Senator Hayden also asked what we now know about the banks. The benefit of this comprehensive assessment is that we now have a much greater insight into the general health of the banks. Until now, part of the problem was that there were many banks about which people did not know very much. A great deal of upset was caused when various things started coming out all of a sudden. There was a lot of shock in the markets. Now that the ECB has done an analysis of the banks, it has a much greater understanding of them. The Senator is right to suggest that some banks have further work to do. The ECB now knows and understands the issues, whereas in the past many of the local supervisors did not have that type of information.

Senator Aideen Hayden

I do not want to be mean when I say we know there are patients on trolleys, but resolving the crisis in our hospitals and reforming the HSE is a totally different matter. My final question relates to the €55 billion. What happens to that money when it is sitting around and hopefully not ever being used? Is it being put to any useful function?

Mr. Aidan Carrigan

The single resolution board would have a remit to manage that money and make sure it is used efficiently.

Mr. Chris Mills

I would like to add to that. The European Commission is charged with drawing up a delegated regulation that specifies how the single resolution board is able to invest those moneys. The single resolution mechanism regulation specifically sets a relatively low risk tolerance for the types of investments it can made. The European Commission is drawing up that regulation at present. It is not in effect yet.

Senator Aideen Hayden

I worked once as a solicitor. There were plenty of wards of court who had vast sums of money invested in blue-chip stocks that turned out not to be quite so blue-chip. We should hope the €55 billion is invested in small firms or small and medium-sized enterprises.

Chairman

I thank Senator Hayden. I call Deputy Tóibín.

Deputy Peadar Tóibín

Tá brón orm go raibh mé déanach agus gur chaill mé an chéad chuid den chur i láthair. I would like to highlight a couple of things. All of the Irish banks are being supervised. Obviously, all of the authorised Irish banks are involved in this fund. Is that right?

Mr. Aidan Carrigan

The single supervision mechanism is now responsible for the supervision of every bank in the euro area.

Deputy Peadar Tóibín

Is it not the case that at one stage, the Germans had difficulty with all of their banks being supervised?

Mr. Aidan Carrigan

Under the solution that was found, the single supervision mechanism has direct responsibility for the supervision of the 138 largest banks in Europe and is also responsible for ensuring the supervision by national authorities of all other banks to European standards. The ECB is responsible for the supervision of all banks. It works with national authorities to ensure there is supervision.

Deputy Peadar Tóibín

Okay, but there is a kind of tiering of direct authority with regard to supervision.

Mr. Aidan Carrigan

The national authority would have day-to-day responsibility for the relationship with smaller banks, subject to ECB rules.

Deputy Peadar Tóibín

Grand. In response to Deputy Boyd Barrett earlier, Mr. Sheridan spoke about the hierarchy and about the bail-in. Obviously, the whole process has certain elements after the bail-in. Could he talk me through the hierarchy that is followed when dealing with a resolution?

Mr. Cathal Sheridan

Right. We start with the bail-in process.

Deputy Peadar Tóibín

What happens after the bail-in?

Mr. Cathal Sheridan

The bail-in occurs in the context of the single resolution mechanism, and as part of this intergovernmental agreement. We then move to the use of the resolution fund when 8% of the total liabilities of the firm have been bailed in. I will explain how it operates. The first call is on the national compartment of the affected member state. This is done to absorb further losses. If there are still losses to be absorbed, we move on to the mutualised elements.

Deputy Peadar Tóibín

Therefore, the state is the second tier of the-----

Mr. Cathal Sheridan

The state's national compartment-----

Deputy Peadar Tóibín

Can Mr. Sheridan explain that to me?

Mr. Cathal Sheridan

The structure of the single resolution fund is compartmentalised in the first eight years. That means the banks of the various member states pay their contributions into the national compartments of their respective member states. There is an Irish national compartment.

Deputy Peadar Tóibín

Does the compartment remain after mutualisation?

Mr. Cathal Sheridan

The compartment goes.

Deputy Peadar Tóibín

Does that mean the involvement of the state as the second tier goes as well?

Mr. Cathal Sheridan

Yes.

Deputy Peadar Tóibín

Okay. It then goes straight into the-----

Mr. Cathal Sheridan

It goes straight into the actual fund itself.

Deputy Peadar Tóibín

The mutualised fund-----

Mr. Cathal Sheridan

When there is a call on the fund during the transitional period, the first port of call will be to the compartment of the member state in question. If there are still losses to be absorbed, there is then a move to the mutualised element of the other compartments. It has been developed in a way that ensures the mutualisation of the compartments increases rapidly in the early years. At the end of the second year, up to 60% of the other compartments will be used in a given situation. If there was an Irish bank in trouble, some 40% of the Irish compartment would be used in the second year, whereas 60% of the compartments of the other banks would be used. It will work its way through gradually until it is fully mutualised at the end of the eight years.

Deputy Peadar Tóibín

What was the reason behind the eight-year provision?

Mr. Aidan Carrigan

I would like to clarify that when Mr. Sheridan mentioned the member state's compartment, he was referring to the compartment that is funded from the banks in that member state, rather than from the member state itself. The banks are always providing the funding here.

Deputy Peadar Tóibín

Yes.

Mr. Aidan Carrigan

The eight-year provision was part of what Senator Hayden referred to. Some member states were concerned that there were pent-up problems in other member states. They did not want to immediately inherit all of the bad practices that had been there. The concept of mutualisation was developed to allow a gradual taking of responsibility for the broader European Union.

Deputy Peadar Tóibín

What happened to the European stability mechanism? Was it not supposed to be the bailout?

Mr. Aidan Carrigan

The European stability mechanism is still there as an ultimate aid to member states. After one has bailed in the 8%, one has taken the further 5% from the fund, one has reverted and bailed in everything else that is capable of being bailed in, one has called on the member state in that area to assist and the member state has claimed it cannot assist, there is provision for the European stability mechanism to step in at that stage and provide further sources.

Deputy Peadar Tóibín

Has any analysis been carried out by the Department on the benefits of Ireland applying for retrospective recapitalisation of the pillar banks?

Mr. Aidan Carrigan

As the Deputy knows, under the recent ESM agreement, provision remains for direct recapitalisation and for that to be effected retrospectively or retroactively. The terms and conditions in that regard have not been worked out and any claims-----

Deputy Peadar Tóibín

From the ESM side?

Mr. Aidan Carrigan

Any request for retrospective capital would have to be submitted to the ESM and the ESM would then have to agree on how that would operate.

Deputy Peadar Tóibín

We are six months into that opportunity for application. Has there been any effort to apply for that?

Mr. Aidan Carrigan

I think the Minister has referred to it in response to parliamentary questions in the Dáil. As the Deputy says that possibility is there but at the moment there is also a much healthier market-based interest in investing in the banks. All aspects of the potential recapitalisation sources are being assessed on an ongoing basis but it is a matter for the Minister.

Deputy Peadar Tóibín

Is it the case that there has not been an application or preparation of an application?

Mr. Aidan Carrigan

That is correct.

Deputy Peadar Tóibín

Britain is not involved in this new process.

Mr. Aidan Carrigan

That is correct.

Deputy Peadar Tóibín

Is there an extra cost to the participating countries as a result of that? Is it the case that if Britain were involved, there would be a necessity for a larger pot or is it that as Britain is not involved, each country has to produce more?

Mr. Aidan Carrigan

Obviously, if it is a case of more liabilities to be covered, there would be more contributions made and there would be a bigger pot to cover those extra liabilities.

Deputy Peadar Tóibín

Bank customers are hard-pressed at the moment. Is there a likelihood that this extra charge will be passed on to the customer?

Mr. Aidan Carrigan

In the context of the bank budgets, we do not think the extra charge here relative to the current national bank recovery and resolution directive would be so significant that there would be anything significant or substantial with regard to costs.

Deputy Peadar Tóibín

It would be €1.3 billion out of the Irish banking market.

Mr. Aidan Carrigan

Currently there is a national resolution fund. Therefore, as we have indicated, it will be somewhat more expensive but not of such a scale.

Deputy Peadar Tóibín

Sin é. I thank Mr. Carrigan.

Deputy Michael Creed

I thank Mr. Carrigan and his colleagues for their opening remarks and responses to questions to date. It is appears to me that this is part of the new architecture being put in place and we are really not 100% sure it will work, but we hope it will. It appears to be a reasonable attempt to deal with what we have been through. In layman's terms, it appears the €55 billion or the €1.8 billion compartmentalised for the first eight years is effectively an insurance fund. Mr. Carrigan may not wish to use that term but it is a fund which can be dipped into in the event that things go badly in the bank. I would love to have an insurance on my house that I only have to pay for eight years. It appears illogical to me that we are not committed to a constant percentage of funds on deposit. If I have money on deposit, is it reasonable for me to contribute 0.5% or 0.1% to be absolutely sure my bank remains viable? Why is it stopping after eight years? Is this an arbitrary timeframe in that we will have €55 billion by that stage and that is the fund we regard as reasonable? We need to get the fund up and running but thereafter is it not reasonable that banks would continue to pay perhaps a significantly reduced amount to this which would continue as an insurance fund, in effect, that they can ultimately call on?

Mr. Cathal Sheridan

As part of the negotiation of this regulation, the view was taken that €55 billion was a suitable sum of money to have in place to help with resolution when it is taken into account that most banks will cover the losses through the bail-in process which is expected to absorb the bulk of losses where a bank is put into resolution. The view is that the resolution fund is there as a fall-back position to supplement and cover any additional losses. The view is that it will take a while to build up to that target level as it is a significant sum of money. That is why they gave it an eight-year period. Obviously during that period there is a possibility that money will be called from the fund and therefore the fund will have to be built up again. I think one could probably envisage that banks will continue to pay into that fund to reach the €55 billion or 1% of covered deposits at European level, whatever that happens to be in ten years time, to ensure there is sufficient money available for resolution purposes.

Deputy Michael Creed

Surely, in light of the systemic banking collapse we had in this country, €55 billion is not a large fund on a pan-European basis to cover banks that fail? Is it really the case that when we strip down all the jargon around this that this is a political fix, that €55 billion is nowhere near what is necessary? Is it the case that we have to be seen to be doing something but in reality we are coming up well short? If we are coming up well short why not contribute? Why not be realistic about it and decide we need an insurance fund? We all pay for insurance every year and not just for eight years and it could be that we would have to pay insurance again in three years time because someone drew out of the pot.

Mr. Aidan Carrigan

On the insurance comparison, insurance is structured so that there are regular claims and it is expected that there would be a certain number of claims in any one year, that one pays some more and that one is paying a certain amount towards general insurance issues. What we are talking about is different from insurance in that it is creating a fund that can be called on in the event of certain things happening. The assessment of €55 billion was made on the advice of the financial experts, the ECB, the European Commission and the input of all 28 member states. Therefore the views of the 28 governments, the ECB and the European Union were that this was a reasonable sum that would be likely to cover a bank resolution situation in the most likely bank resolution situation to arise. In the event that more than €55 billion is required, there are provisions for ex post contributions or for back-stops, as we mentioned earlier. It is different in its structure and in its purpose.

Deputy Michael Creed

As I understand it, the reason for the intergovernmental agreement on this new architecture was because some concerns were expressed about or member states had reservations about transferring funds into this new mechanism so therefore a legal framework of an intergovernmental agreement and parliamentary approval was needed. Is the Department satisfied that all this is watertight in terms of legal challenges?

Mr. Aidan Carrigan

The Irish position in the negotiation of this was that an intergovernmental agreement was not necessary. The European Commission was very strongly of the view that this could be accommodated within the treaties. However, a number of member states had serious concerns and were concerned that there would be a legal challenge. The very purpose of the intergovernmental agreement is to make this watertight and to protect against a legal challenge which was a concern of certain member states. It is most unlikely that it will increase the risk of legal challenge.

Deputy Michael Creed

I have two further questions. I refer to accountability of the structures. For example, in the case of the banking inquiry the ECB has said it is not accountable to national parliaments. We are making financial contributions via our banks, some of which are State-owned. What is the accountability structure for the single resolution board or is that the appropriate vehicle to account to either the national or European Parliament or to ECOFIN? Where is the accountability structure? We are saying we were not up to the job in terms of our own financial regulation and in a way we are pooling our sovereignty in that regard with these new structures.

How can we be sure it will manage to do its job just because it is a European initiative? One of the ways of ensuring it will not fail is by making it accountable. What is the accountability structure?

Mr. Aidan Carrigan

The single resolution mechanism regulation provides for an accountability structure. I do not have the detail of it but as it has been established as an agency within the European Commission, it will be accountable to the Commission. As a European body, it is accountable to the European Parliament and the Council. Provisions in the regulation set out how it will be accountable to the Parliament. There is also a specific provision requiring it to reply to national parliaments where they challenge it or raise questions, and to provide annual reports to national parliaments.

Deputy Michael Creed

Mr. Carrigan made reference to the Commission. Is it envisaged that the board shall include a nominee from each member state?

Mr. Aidan Carrigan

Yes.

Chairman

On behalf of the joint committee, I thank the witnesses from the Department of Finance and the Central Bank for participating in the meeting and for the material they supplied to the committee.

The joint committee adjourned at 3.40 p.m. until 2 p.m. on Thursday, 11 June 2015.