Dáil Éireann Debate, Tuesday - 23 June 2015
223. Deputy Brian Walsh asked the Minister for Finance his views on the European Union bank recovery and resolution directive, or bail-in directive; and the implications he foresees for Ireland, Irish banks, and bondholders after January 2016. [24484/15]
View answerThe Bank Recovery and Resolution Directive (BRRD) lays the ground rules for the future application of resolution tools in all Member States and incorporates the principle that shareholders should bear losses first and that creditors bear losses after shareholders.
There are three pillars to the BRRD framework to facilitate a range of appropriate actions by authorities:
- Preparatory and preventative measures including reinforced supervision and robust recovery and resolution planning for major institutions,
- Early intervention provides supervisory powers to implement recovery plans and amongst other things remove senior management, and
- Resolution tools including sale of business, bridge bank, asset separation and bail-in.
From the start of 2016 the Single Resolution Mechanism (SRM) will apply the BRRD rules in a banking union context. A pan-European resolution authority, the Single Resolution Board (SRB) has already been established and it will have the power to restructure and wind-down failing banks.
There are a number of benefits to the SRM. Firstly it requires banks (as per the BRRD rules) to hold a significant level of loss absorption capacity in order to ensure as far as possible that shareholders and creditors are capable of covering any losses that arise should they get into financial difficulties. This means that in a resolution scenario bondholders will be bailed in, where necessary in accordance with the resolution hierarchy. Secondly, it provides for the Single Resolution Fund (SRF). The target level of the SRF is 1% of covered deposits of participating Member States which is equal to approximately €55bn and which is required to be reached within eight years. The fund will be paid for by contributions from the banking sectors of the participating Member States. Irish banks including international banks operating out of this country are expected to pay in the region of about €1.8bn towards this target level i.e. about €225m a year. It should be noted that these figures are still quite approximate.
The SRF where needed will be used after the bail-in process has been exhausted and there are still losses to be absorbed. During the initial eight years (transition period), the SRF will be compartmentalised in order to facilitate its progressive mutualisation. The contributions of banks will be paid into their national compartment, and should one of them get into financial trouble, then this compartment will be the first port of call for funding, where needed. However funding if required will also be available from the other compartments, and as the transitional period passes, more money will be taken from the other national compartments and less from the compartment of the affected Member State, until at the end of the transition period, the SRF has become fully mutualised.
The major implication for Irish banks is that the progressive mutualisation of the SRF should go a long way towards breaking their link with the sovereign, and thus enable them be evaluated by the market on their own underlying commercial merits.
