I am pleased to present the Finance (Certain European Union and Intergovernmental Obligations) Bill to the House. It should be noted that the Bill is very much of a technical nature, designed primarily to address an international obligation arising from the banking union agenda and to allow Ireland fulfil its obligations under the criminal sanctions for market abuse directive.
The basis for the Bill is the requirement to put in place bridge-financing arrangements to the Single Resolution Fund. This was triggered by the statement of 18 December 2013, adopted by Eurogroup and ECOFIN Ministers on the funding of the Single Resolution Board. It required, particularly in the early years, that member states participating in the Single Resolution Mechanism to put in place a system by which bridge-financing would be available as a last resort and in full compliance with state aid rules. It was also stated such arrangements should be in place by the time the Single Resolution Fund became operational.
The Single Resolution Fund is the financing element of the Single Resolution Mechanism, designed to provide, within a banking union context, 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 the banking union and will ensure that if a bank subject to the Single Supervisory Mechanism was to face serious difficulties, its resolution could be managed efficiently with minimal costs to taxpayers and the real economy through the application of resolution tools such as bail-in and the use of the Single Resolution Fund, financed by the banking sector.
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 the participating member states, which is to be reached at the end of eight years. This is estimated to be approximately €55 billion. During the transition period to full mutualisation, the fund will operate through national compartments 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 the bail-in which involves the write-down of a minimum of 8% of the bank’s equity, capital instruments and eligible liabilities, proves insufficient to cover the losses, the next step will be the provision of funding from the national compartment of the affected member state. If there are still losses to be absorbed after this step, funds are then obtained from the mutualised elements of other national compartments. There is also the option for the Single Resolution Board to borrow from the market to cover losses.
Depending on the scale and circumstances, however, this may not always be possible. As a result, the Single Resolution Board may find itself in a situation, especially in the early years, where there are still losses to be absorbed after the bail-in process has been completed and the resolution waterfall process has been exhausted. In such a situation, it will require an alternative source of financing. It has been agreed by the Council of EU Finance Ministers that this should take the form of national credit lines. Most member states have either already put national credit lines in place or are about to do so, as there was a commitment following European Finance Ministers’ agreement on the approach last December that this needed to be in place by 1 January 2016. This was an ambitious target but the European Council conclusions on a roadmap to complete the banking union, published in June 2016, noted that all remaining member states were committed to signing the loan facility agreement by the end of September 2016. Accordingly, it is crucial we progress the Bill as quickly as possible to enable Ireland to meet its banking union obligations.
The consequence of not signing the loan agreement with the board is that should an Irish bank get into financial trouble before the enactment of this legislation, the funding available to the Single Resolution Fund will come from the small amount in the Irish national compartment - €173 million - which was transferred from the national resolution fund for 2015 and 2016, with the mutualised elements of the other national compartments, also only a small amount, and any borrowing the Single Resolution Board can carry out. However, if this were to prove insufficient, there would be no fall-back source of financing from the Single Resolution Board as the national credit line would not be put in place. It is important to point out that the banks are currently in good health. I believe the likelihood of this loan facility agreement ever being called upon is minimal. However, the provision of this national backstop for the Single Resolution Board is key from a confidence perspective as it provides another indication for the market that the banking union member states are serious about ensuring stability in their banking sectors.
The loan facility agreement is an individual agreement between each participating member state and the Single Resolution Board on the credit line they commit to provide for it where the need for bridge-financing arises. The terms and conditions of each agreement are, broadly speaking, identical, aside from the amount to be requested from each member state. The loan facility agreement provides that the maximum aggregate to be provided by all member states is €55 billion. To determine the share of each participating member state, it was agreed to use the relative size of each member state's compartment in the Single Resolution Fund using the estimate of the European Commission as of 27 November 2014. This constitutes the allocation key between participating member states for determining their respective credit lines.