I move: "That the Bill be now read a Second Time."
There has been much discussion at international level on how best to deal with financial institutions in distress. Clearly, Ireland has much to offer in this debate given recent experience. As we move to implement the restructuring of the domestic banking system I announced in my statement on 31 March last, it is also important we provide the essential tools to manage and resolve quickly and effectively any of our banks that in the future may be faced with difficulties.
The Central Bank and Credit Institutions (Resolution) (No. 2) Bill offers a necessary framework to enable the national authorities to use a variety of tools to address and resolve financial institutions that find themselves in distress. As we reform and rebuild our supervisory structure, it is important the Central Bank, as the resolution authority, can avail of such resolution powers which will be regarded internationally as a prerequisite in the post-financial crisis supervisory infrastructure.
The programme for Government recognises that a comprehensive and effective bank resolution framework is essential for building a more sustainable economic system but that it is also important the taxpayer should not be left with the bill for resolving failing or failed banks. The Government programme commits, therefore, to a modern resolution regime for dealing with bank insolvencies and that the banking sector shall contribute the funds to meet this.
This new Bill differs from the Credit Institutions (Stabilisation) Act, enacted by the Oireachtas last year, which was very much focused on providing for the reorganisation and restructuring of the domestic banking system in line with the EU-IMF programme of support for Ireland. It conferred powers on the Minister for Finance, after consulting the Governor of the Central Bank, to seek court orders to issue directions to banks, to restructure banks and to reorganise their assets and-or liabilities.
However, the Act will have a temporary effect only. As it is intended its provisions will lapse in 2012, it is necessary, therefore, to have a more permanent framework in place to address credit institution resolution requirements that may arise in the future. The intention of this legislation is to put such a permanent resolution framework in place so that, if it proves necessary in the future, it will be possible to facilitate the resolution of financial instability in credit institutions at least cost to the State.
Ireland is not alone in having to introduce new legislation to deal adequately with failing banks. Many countries have had to take steps to enhance the national and international frameworks for resolving financial institutions in difficulty. Both the EU and the G20 are now paying considerable attention to this issue. The European Commission is expected to publish a proposal for an EU-wide crisis management framework in September. Our nearest neighbour, the UK, one of the first countries to experience the difficulties of distressed banks in the current crisis and also to experience the lack of an effective toolkit to deal with the problem, introduced a new special resolution regime in its 2009 banking Act. Other countries, including Denmark and Germany, have also taken steps to establish or enhance their bank resolution regimes.
It is important Ireland has a permanent resolution framework to deal with future problems that may arise and that it will never again allow the financial burden for resolving banks to be unduly placed on the taxpayer. This Bill provides such a permanent special resolution regime in this State and will allow the Central Bank to deal in an effective manner with credit institutions that are failing or likely to fail in the future. It also provides that this will be done in a way that provides maximum protection for the Exchequer and provides maximum confidence in the financial system as a whole. The tools, to be provided in this Bill, to achieve these objectives are bridge-banks, the ability to transfer assets and liabilities from failing banks, special management orders, modified liquidation process specific to credit institutions, the formulation of recovery and resolution plans and the establishment of a new credit institutions resolution fund.
Part 1 deals with certain preliminary items. For example, section 2 sets out the definition of several terms used while section 3 makes clear the Bill will succeed the Credit Institutions (Stabilisation) Act and that no institution will simultaneously fall within the ambit of both Acts. Section 4 sets out the legislation's purposes, which I have already outlined for the House.
Part 2 addresses general matters regarding the exercise of the resolution powers provided for in the Bill. Section 5 provides that the Governor of the Central Bank is responsible for the exercise of the functions of the Central Bank under the Bill, though he may delegate those functions to officers or employees of the bank subject to ensuring the performance of that delegated function is operationally separate from the regulatory and supervisory responsibilities of the bank. Section 6 is a standard provision that safeguards the independence of the Governor and the Central Bank. Section 7 will require national authorities to have regard to EU law and relevant guidance in exercising a power under this Bill.
Section 8 sets out the conditions that must be fulfilled before the Central Bank can make an intervention in respect of a credit institution. It will be noted that it is the Central Bank that will, in the first instance, be required to form the opinion that intervention is required in a particular case. This is an important change of focus to the existing Credit Institutions (Stabilisation) Act. Under the latter, the power of initiation largely rests with the Minister. This is justifiable in dealing with the current emergency crisis and in the context of the large amount of financial support from the State to the Irish banking system. In the permanent resolution regime as provided for in the Bill, it is important to place the power of initiation to address a failing credit institution with the appropriate banking authority. However, the Bill provides that the Governor of the Central Bank will be obliged to consult the Minister in appropriate circumstances.
Part 3 of the Bill deals with the credit institutions resolution fund. It is important that taxpayer input into the resolution of future banking problems be minimised and that the banking sector itself should accumulate and have funds available for such a purpose. The establishment of a fund is essential to achieve this objective. Section 9 provides for the establishment and purpose of the resolution fund. Section 10 provides that the Central Bank shall manage and administer the fund. Sections 11 and 12 provide that the Minister may, and that authorised credit institutions shall, contribute to the fund. The Minister shall be entitled, however, to be reimbursed from the fund for any contributions made from the Exchequer. Section 14 provides that the Minister shall make regulations proscribing the level of contribution required from credit institutions, as well as matters governing the administration and operation of the fund.
As indicated previously, the Bill provides for a wide range of resolution tools to be available to the Central Bank to deal with distressed or failing banks. The first of these is set out in Part 4, which provides for the establishment of bridge banks. These banks will be able to hold, on a temporary basis, the assets and liabilities of a failing or failed bank before they are moved to a sustainable bank. Section 16 provides that the Central Bank may establish a company, capitalised from the resolution fund, to hold, on a temporary basis, transferred assets and liabilities pending its onward transfer to another institution as soon as practicable. Section 17 provides that such a bridge bank may carry on a banking business while it is in possession of these banking assets and liabilities.
Part 5 deals with the transfer of assets and liabilities that will provide the Central Bank with the power, subject to meeting the prescribed circumstances, to transfer the assets and liabilities of a relevant institution to a third party. This is similar to the power currently available to me under the Credit Institutions (Stabilisation) Act. What is envisaged may include, if necessary, transferring the assets and liabilities to a bridge bank provided for in this Bill.
Section 20 sets out the preconditions to be met before a proposed transfer order can be made by the Central Bank. Section 21 outlines the arrangements, timing and procedures to be followed prior to making a proposed transfer order, with section 22 covering the contents of the proposed order. Section 23 provides, however, that transfer orders shall be made by the High Court setting out some of the considerations it may make when hearing the application from the Central Bank. Sections 24 to 27, inclusive, set out the publication procedures and arrangements for varying or setting aside the court order. Section 28 details the content of transfer orders. Section 29 provides that the Minister may, at the request of the Central Bank, provide a financial incentive to facilitate a transfer. However, the Minister may recover any such amount provided for this purpose from the resolution fund. Sections 32 and 33 set out the effects of the transfer orders, while section 34 makes specific provision for the transfer of foreign assets and liabilities under a transfer order.
Part 6 of the Bill deals with special management orders. This will be another resolution tool available to the Central Bank and will enable it, in certain prescribed circumstances and subject to a High Court order, to appoint a special manager to an authorised credit institution. The purpose of the special manager will be to manage the business of the institution having regard to any recovery and resolution plans or to wind down the institution with a view to liquidation. Section 38 sets out the preconditions for making proposed special management orders.
Section 41 provides that the High Court, on application by the Central Bank, shall make a special management order. Section 45 outlines the information to be included in special management orders. Sections 46 and 47 deal with the terms of appointment and remuneration of a special manager. Section 50 is a key provision as its sets out the functions of special managers and provides that the special manager shall take over the management of the business. Section 52 sets out the effect of the appointment of a special manager, while section 53 will enable the special manager to, if necessary, remove officers or employees of the business. Section 57 provides for the circumstances in which the special management of an authorised credit institution terminates.
Part 7 provides for a modified liquidation process for financial institutions where the liquidator will be mandated with two objectives. The first is to work with the Central Bank to ensure that deposits covered by the deposit protection scheme receive payment or else to have the deposits transferred to a sound institution and, second, to achieve the best results for the institution's creditors as a whole. Section 60 provides that the Central Bank may petition the High Court to wind up an authorised credit institution. Section 61 provides that no other person may seek to appoint a liquidator to an authorised credit institution without first informing the bank of such a proposed course of action and obtaining confirmation from the bank that it has no objection to such a step. Section 62 further provides that only a liquidator approved by the bank may be appointed to a credit institution. This will ensure that the Central Bank will have overall control of any proposal to seek to appoint a liquidator to a credit institution.
Section 63 provides for the objectives of a liquidator to an authorised credit institution. Section 64 provides that finance may be made available from the deposit protection fund or the credit institutions resolution fund in order to facilitate the transfer of deposits from a failing bank. Section 65 provides that any such payment will constitute a debt due by the credit institution. Sections 66 to 69, inclusive, deal with a liquidation committee to which the liquidator will be required to report. Section 70 provides assurance to depositors whose deposits have been transferred by a liquidator.
Part 8 deals with recovery plans and resolution plans. This part is intended to enable the Central Bank and each institution to make appropriate preparation to deal with potential financial difficulty. Specifically, it will empower the Central Bank to require an authorised credit institution to prepare and implement a recovery plan and the Central Bank to prepare and implement a resolution plan. Sections 73 and 74 provide that the bank may direct an institution to prepare and implement a recovery plan and section 75 provides that the Central Bank may prepare a resolution plan.
Part 9 contains a number of miscellaneous provisions necessary to ensure that the powers provided under the Bill are effective. Section 77 is a key provision as it is necessary to ensure that the reorganisation and restructuring measures provided for in the Bill can be recognised in other EU member states through the mechanisms available in the credit institutions winding up directive, CIWUD, on the reorganisation and winding up of credit institutions. This directive provides that the authorities in the home member state alone shall be empowered to decide on the implementation of reorganisation or winding-up proceedings of an authorised credit institutions in accordance with its own laws and that such decisions shall be effective in all the other member states. This is particularly important given that many agreements, including debt agreements, entered into by Irish credit institutions are governed by the laws of other member states. The existing Credit Institutions (Stabilisation) Act has similar provisions and this critical provision will, therefore, be retained in the permanent resolution Act for authorised credit institutions.
Sections 79 and 80 provide for confidentiality provisions in the operation of the Bill, if these are considered necessary in particular instances for stability reasons. Section 81 deals with agreements to which an authorised credit institution, any of its subsidiaries, its holding company and any sister company, are party or in which they have an interest. Agreements may provide for their termination or other consequences in certain circumstances. This section provides that none of the specified consequences will arise by virtue of certain actions, including among others, the enactment of the Bill, the publication of the Bill, the making of any statement by the Minister, the Central Bank or an authorised credit institution with regard to the Bill, or the Bill itself and the use of any powers under the Bill. Sections 83 and 84 provide for the limitation of judicial review and of certain rights of appeal to the Supreme Court. Sections 88 and 89 provide that the Central Bank may issue guidelines on the exercise of its functions under the Bill and also that the Minister may specify a relationship framework to govern his relationship with the Central Bank. The Bill also provides for some technical amendments to a number of other enactments and statutory instruments, including the Credit Institutions (Stabilisation) Act 2010.
This Bill is a most important one for consideration by Members of the Oireachtas. It is essential, not only for sound financial stability reasons but also for our future general economic well-being that the national banking authorities will have the most comprehensive and effective tool kit available to them to preserve and protect individual financial institutions and the financial system as a whole. The Bill will provide these important tools. The future protection of our financial system, depositors and taxpayers requires nothing less. I, therefore, commend the Bill to the House.