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Joint Committee on Finance, Public Expenditure and Reform díospóireacht -
Thursday, 7 Nov 2013

Scrutiny of EU Legislative Proposals

We will now deal with No. 10 on today's agenda, scrutiny of COM (2013) 520. This is a proposal for a regulation of the European Parliament and the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a single resolution mechanism and a single bank resolution fund and amending Regulation EU 1093/2010 of the European Parliament and of the Council. I welcome Mr. Aidan Carrigan, Mr. Pat Casey, Mr. Cathal Sheridan and Mr. Liam Morris of the Department of Finance. I understand Mr. Morris is late of this parish.

The meeting will begin with an opening statement by Mr. Carrigan, followed by a question and answer session. I remind members, witnesses and those in the Visitors' Gallery to switch off their mobile telephones. I advise the delegates that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence in regard to a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are further directed that only evidence connected with the subject matter of these proceedings should be given and are asked to respect the parliamentary practice that, where possible, they should not criticise or make charges against any person, persons or 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 House 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 statement.

Mr. Aidan Carrigan

I thank the committee for the invitation to brief it on the European Commission's legislative proposal for a single resolution mechanism, SRM, which is the next essential step in creating a European banking union. I am accompanied today by colleagues from the Department of Finance. As the Chairman outlined, the proposal is for a regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a single resolution mechanism and a single bank resolution fund and amending EU Regulation 1093/2010 of the European Parliament and of the Council.

The first step in creating a banking union for Europe was taken with the recent adoption by the Council and the European Parliament of the single supervisory mechanism, SSM, which was negotiated under the Irish Presidency. Under the SSM, responsibility for the direct supervision of the most significant credit institutions will transfer to the European Central Bank, acting jointly with national supervisors. The ECB will issue instructions, regulations and guidelines to national supervisors for tasks performed by them as part of the SSM. The ECB will take over its full tasks under the SSM in November 2014. The banking union will apply to all members of the euro area and any non-euro area member states which choose to opt in.

A complete banking union requires common supervision, deposit insurance and a common resolution framework, with an appropriate fiscal backstop. Following the adoption of the single supervisory mechanism, the European Council called for the creation of a single resolution mechanism for banks covered by the SSM. This is consistent with the principle underpinning the banking union that where supervision is centralised, resolution should also be exercised at the same level of authority. If supervision were exercised at the central level but resolution remained national, tensions could emerge between the EU-level supervisor and the national resolution authority over how to deal with an ailing bank.

The single resolution mechanism consists of a single resolution board and a single resolution fund. The fund will be financed by contributions from the banking sector. The board will generally make the initial decision about whether a bank needs to be put into resolution and will draw up the necessary plans and make a determination as to whether funding from the single resolution fund is necessary. However, without a treaty change, it is not possible for an EU institution to delegate policy-making powers to a subsidiary body such as the SRB. Therefore, the European Commission will take the final decision to trigger resolution and use the fund.

The basis for implementing resolution under the SRM will be the toolkit set out in the bank recovery and resolution directive, BRRD, agreed on by member states at the ECOFIN meeting that took place on 26 June under the Irish Presidency. This common toolkit for resolution will help ensure a reasonably level playing field across the EU between participating member states in the SSM-SRM, and those which decide to remain outside of it. Although the BRRD has yet to be finalised, trilogue negotiations are ongoing with the European Parliament and it is hoped agreement can be reached by the end of the year.

Before proceeding to outline the main elements of the proposal, I will briefly explain why a single resolution mechanism is considered necessary in addition to the bank resolution scheme already agreed by the ECOFIN Ministers. The purpose of the BRRD is to provide national authorities with common powers and instruments to pre-empt bank crises and resolve any financial institution in an orderly manner in the event of failure, while preserving essential bank operations and minimising taxpayers' exposure to losses. These powers represent a minimum harmonisation of the rules to be used in resolution. There remains, therefore, the potential for variations in how member states handle resolution.

In a banking union context, however, stakeholders generally agree that in a situation where the supervision of banks has transferred to the centre, resolution should take place at the same level. Without such symmetry, market expectations about member states' inability to deal with bank failures nationally could continue, reinforcing feedback loops between sovereigns and banks and fragmentation and competitive distortions across the Internal Market. Furthermore, the Commission is of the view that a strong single resolution mechanism is critical to ensure timely and least-cost resolution of banks. Its position is that the goal should be a centralised authority with power to trigger resolution and make decisions on burden sharing.

Ireland has welcomed the single resolution mechanism as the next essential step in creating a banking union. The SSM is now in place and the ECB will take over direct supervision in November of next year. Progress is being made in discussions with the European Parliament on concluding the EU deposit guarantee directive. The creation of the SRM with centralised decision making by a single resolution board and equipped with the resources of a single resolution fund, financed by contributions from the financial sector, represents a significant step in achieving the core objective of breaking the link between the sovereign and the banking sector.

I will now set out the main elements of the proposal as published by the Commission. In regard to the legal basis for the proposal, the SRM will be based on the Single Market treaty Article 114, which provides for the harmonisation of laws in member states in the pursuit of smooth functioning of the Single Market. The Commission's legal services have indicated that, in accordance with that article, the legal basis to proceed is sound. Treaty change would be required to make the single resolution board independent in its role and while there is a view that this might be preferable, the time required for such a treaty change did not fit into the timetable demanded by leaders and Heads of State - and, for that matter, by the financial markets - for the completion of the banking union. The Commission is of the view that the proposed governance structure, whereby it would retain the ultimate decision-making authority, is consistent with the Meroni principle, which requires that there should be no delegation of discretionary powers with a wide margin of discretion that would have the effect of transferring policy-making powers.

On the issue of scope, it is proposed that the single resolution mechanism will be directly responsible for the resolution of all banks - approximately 6,000 - in member states participating in the single supervisory mechanism. As is regularly recalled, relatively small distressed banks have been the source of considerable systemic difficulties. The proposal does not permit a differentiated approach similar to that in the single supervisory mechanism under which the ECB is responsible for the supervision of all banks but only directly supervises the most significant credit institutions because it is considered that the nature of the resolution process requires a high degree of centralisation of resolution decision making in order that successful bank resolution decisions can be taken rapidly. Irish credit unions are not credit institutions for the purposes of the capital requirements directive and consequently are not within the scope of the single resolution mechanism.

On structure and governance, while the Commission will make key decisions such as in respect of approval of resolution, the single resolution board will prepare and carry out the resolution of any bank in a member state participating in banking union. The board will apply the resolution toolkit as established in the bank recovery and resolution directive. The board will be composed of the executive director, the deputy executive director, representatives of the Commission and the ECB and the representatives of the resolution authorities of each participating member state. Under the proposal, the board would have two configurations, namely, the plenary session which would involve all member states' resolution authorities and the executive session. The executive board will be the key decision making forum of the single resolution board. Under the proposal, as published, the executive board will consist of the executive director, the deputy executive director, representatives appointed by the Commission and the ECB and the relevant national authorities of a credit institution subject to a resolution decision. Decisions will be made by simple majority, with the home resolution authority having one vote and all of the host resolution authorities collectively having one vote. The proposal makes a clear distinction between the role of the single resolution board and that of the national resolution authorities. The single resolution board and, ultimately, the Commission occupy the decision making level, whereas the national resolution authorities will be responsible for implementing all resolution actions decided on by the single resolution board or the Commission. If a national resolution authority does not comply with a decision of the single resolution board, the board or the Commission could directly address executive orders to the credit institution involved.

In practice, it is expected that the ECB, as supervisor, will indicate to the single resolution board that a credit institution in a single supervisory mechanism participating member state is in severe financial difficulties and that the matter should be resolved. The executive board of the single resolution board will prepare the resolution of the bank, including which resolution tools to use and how the single resolution fund should be involved. The proposal provides that the European Commission, acting on the recommendation of the single resolution board or its own initiative, can decide whether to place the credit institution under resolution. The national resolution authority would be responsible for implementing the decisions of the Commission or the board.

The Commission proposes that a single resolution fund be set up in order that funding support for credit institutions in resolution would be available. The fund would be built up over ten years through contributions from the banking sector. It would replace the national resolution funds of participating member states. The target level of the fund is 1% of covered deposits of single supervisory mechanism credit institutions, which should equate to between €55 billion and €60 billion. The single resolution mechanism is constructed with the objective that resolution will be carried out without recourse to national taxpayers' money. Instead, banks will contribute to the costs of resolution though the collection of levies and, where the fund is not sufficient, ex-post levies. Under the proposal, the fund can "seek borrowings or other forms of support from ... other third parties". This could including market-based funding.

Until the single resolution fund reaches its target funding level, provision is made for the member state representative of the executive board to delay but not prevent resolution decisions where they might impinge on national fiscal responsibilities. This is a very sensitive issue for a number of member states and there has been much debate in the Council negotiations on the single resolution mechanism on an EU backstop that would guarantee a line of credit to the single resolution fund in such shortfall situations. Any money advanced by such a backstop would have to be repaid by the banking sector by moneys raised through the levy process.

In view of the high importance and complexity of this proposal, a high-level ad hoc working group of officials and experts from each member state was established. The group has met seven times in order to make progress on this file and has discussed various options for a possible overall compromise. As a result of these debates, the Council Presidency has drafted three compromise texts and is of the view that the third text - to the extent possible - addresses the main concerns raised by the member states. This text will be debated by ECOFIN at its meeting on 15 November. While negotiations continue and agreement has yet to be reached on all aspects of the proposal, Lithuania, the current Council Presidency, is prioritising the single resolution mechanism proposal. The October European Council called for agreement among member states by the end of the year in order to allow for the negotiations with the European Parliament and the co-legislators to reach agreement on the proposal within the current legislative term. Given that European Parliament elections are scheduled for the end of May 2014, this effectively requires agreement between the co-decision authorities by end of March 2014.

Ireland fully supports the creation of the single resolution mechanism as a significant and essential step in creating a credible banking union for Europe. We consider that the Commission's proposal provides a strong basis for a single resolution mechanism supported by an industry-funded single resolution fund. As stated, this issue will take up a large part of the agenda for next week's ECOFIN discussions. The Minister will be briefing the committee further on the matter next week.

I thank Mr. Carrigan for his very detailed briefing. I am aware that we have agreed a timeframe and the purpose of Mr. Carrigan's presentation was to provide us with information. The Minister for Finance, Deputy Michael Noonan, will be coming before the joint committee on Wednesday at 9.30 a.m. prior to the ECOFIN meeting that is due to take place on Friday next. If we want to discuss issues relating to the single resolution mechanism, we will be obliged to provide notification to the Minister of our desire to do so.

I will now take questions from members. I know that some of us are on very tight timetables and if the need arises, we can suspend proceedings.

I thank Mr. Carrigan and his colleagues for coming before us. In what circumstances will the single resolution mechanism kick in? Will it be where a bank goes bust or where a need for additional capital is identified following stress tests?

Mr. Aidan Carrigan

It will not be in a normal situation where a bank needs capital. In such circumstances, the bank in question would have a number of processes in place to allow it to raise capital. I should emphasise that what is being managed under the single resolution mechanism is the rule book of the bank recovery and resolution directive. There will be a process of bank recovery interventions which will be managed by the single resolution board. Where a bank has failed to put straight its own affairs, is in danger of insolvency and where there is a need for resolution intervention, at that stage the single resolution mechanism will kick in. There will still be a range of interventions available to the resolution mechanism in order to deal with recovery plans. The final step would be financial intervention.

Therefore, it can apply where a bank completely fails and is going out of business or where it is in real trouble and a resolution formula is required.

Mr. Aidan Carrigan

The core objective is to maintain the continuity of critical functions so as to ensure the financial stability is not affected or damaged by negative impacts.

Does the single resolution proposal set out the detail of the hierarchy relating to how losses are to be distributed from equity investors to junior bondholders all the way down to insured deposits?

I apologise for interrupting, but I must to leave the meeting. Deputy Kieran O'Donnell will take the Chair in my absence.

Deputy Kieran O'Donnell took the Chair.

Mr. Aidan Carrigan

That is set out in the bank recovery and resolution directive, on which we briefed the joint committee previously and which has now been agreed at Council level. That hierarchy is now subject to further review in the co-decision process of trilogue with the European Parliament.

That is what I indicated in my statement, namely, that we expect it to be concluded by the end of year but it is at Parliament stage. That is in regard to the rule book. The single resolution mechanism we are putting in place, backed by a single resolution fund, will operate that rule book but the rule book is set out under the bank resolution.

When is it envisaged that the SRM will be up and running and that the common resolution hierarchy, the bail-ins as such, will be in operation?

Mr. Aidan Carrigan

The bank resolution is scheduled to commence in 2015. The objective is to have the single resolution mechanism in place in 2015 to manage the introduction of bank resolution.

With regard to the resolution fund and the contribution by the financial institutions to it, will that start in 2015 as well?

Mr. Aidan Carrigan

Yes. That is correct.

It would be at a level of 1% of covered deposits. Is there any estimate of what that would cost Irish banks?

Mr. Aidan Carrigan

We will come back to the Deputy with that figure in case I would give him a wrong figure.

Would that then replace any national fund or will the banks be paying into a national resolution fund and a European one?

Mr. Aidan Carrigan

The intention is that the single resolution fund will replace the national resolution funds and we already have a national resolution fund in place.

Are they currently paying into a national resolution fund?

Mr. Cathal Sheridan

There is a national resolution fund under the national resolution legislation but when bank resolution is introduced the new rates, which probably will be higher than banks are currently paying, will come into effect and will replace the contributions being paid into the national fund.

Europe-wide stress tests will be carried out next year and if that process were to reveal a black hole in the banks' balance sheets and that they need additional capital, then even if this was up and running, that matter would not be dealt with under the SRM, rather it would still be a matter for the investors or whoever to make good the capital shortfall.

Mr. Aidan Carrigan

That is right. There would be a range of policy responses required should that happen, but the single resolution would only be where efforts to deal with any capital shortfall failed and we moved into a resolution situation.

I welcome Mr. Carrigan and his colleagues. I have two questions. In the context of the recent crisis in Cyprus we saw a hit on deposit holders. Where does the establishment of the single resolution mechanism-resolution fund leave the issue of the deposit guarantee?

Mr. Aidan Carrigan

The deposit guarantee stands. As I indicated, parallel negotiations are currently going on with Parliament to confirm the deposit guarantee of €100,000 will be protected at a harmonised level across Europe in a separate directive. The resolution directive recognises that and that protection. I believe the Minister stated here previously that this protection will stand.

What the bank resolution will change, and this was in the BRR deal rather than in this negotiation, is that all deposits, even those that are not guaranteed, will be given a depositor preference treatment in the event of resolution. Up until now in a resolution situation as soon as one moved into senior bond holders one had to treat depositors on a pari passu basis and they had to suffer equivalent losses whereas, under the bank resolution directive, they will be given a depositor preference, which makes it even less likely that they will ever be called on in a situation like that.

That extends to all deposit holders regardless of whether they are EU citizens or from outside the EU.

Mr. Aidan Carrigan

Yes.

My second question relates to the accountability of this board to the Commission, the Parliament and domestic parliaments. Has that been considered?

Mr. Aidan Carrigan

Yes. That has been addressed. Basically, the single resolution mechanism is a European institution. It is set up under the European Commission. In the first instance it will be accountable to the Europe Council and to the European Parliament but, similarly, because of the involvement of the national authorities there will also be direct accountability to national parliaments through the national authority, and there is provision for the executive director to also deal with questions or issues raised by national parliaments.

I thank Mr. Carrigan and the officials for attending. If the resolution fund was in place, would that in any way lessen capital ratio requirements under Basel II because at least it would be a level of protection with a resolution fund in place in the event of a resolution being required? It is an insurance policy for people who have deposits. If the resolution fund was not in place there would be a greater risk and perhaps a requirement to have higher capital ratios.

Mr. Aidan Carrigan

The Deputy is straying into the area of what people in the negotiations referred to as moral hazard, namely, that if there is too strong a resolution in place people will not pay attention to good proper prudential management, but that is not the case because CRD IV sets out very clear capital requirements and very clear ways in which the risks of a bank have to be managed and those risks will continue to-----

I am sure those rules were drawn up before this resolution process was drawn up.

Mr. Aidan Carrigan

The resolution process is not meant to result in banks being able to take additional risks which are not seen as good prudential management. The CRD IV was drawn up in awareness that resolution procedures would be coming down the tracks. It is clearly not the intention that because there is a safeguard there should be less effective management of capital.

Mr. Carrigan can understand the concern that some people might have because they feel at least the ultimate damage to their depositors would be less knowing there is a resolution fund in place. I get his point. There is a question of moral hazard and that is subjective, and that is what the supervisory mechanism is there to ensure does not happen. That leads me on to my next question.

The supervisory mechanism will only deal with the most significant institutions whereas the resolution mechanism will deal with up to all the 6,000 banks. Where is the trigger in that respect? One can easily recognise that an institution that is being supervised by the European Central Bank and authorities through the supervisory mechanism would have a good handle on those and would see a problem arising and if it arose they would be on top of it, but with regard to all the other institutions that are not being supervised, is there not a concern that people will only hear about it when things have gone completely wrong because there was not the same level of supervision?

Mr. Aidan Carrigan

First, this is a live issue in the discussions at Council, as in the scope of the direct oversight by the single resolution mechanism, but the vast majority of member states are of the view that the single resolution mechanism should apply equally to all banks. The difference is that in the supervisory situation there is a day-to-day supervisory function in relation to all banks and, therefore, the direct supervision has been netted down to the largest banks, but the ECB retains responsibility for supervision of all banks through the national resolution authorities. In the case of resolution, there is not an ongoing oversight on a daily basis of all banks because resolution events only happen, we hope, very rarely. Therefore, resolution interventions are only required on an exceptional basis. One is not comparing like with like when one compares the day to day supervision of 6,000 banks with a resolution responsibility for 6,000 banks.

They will have resolution responsibility but would they have any supervisory responsibility?

Mr. Aidan Carrigan

Would which?

The resolution fund.

Mr. Aidan Carrigan

The resolution board will have will have responsibility for managing resolution should it arise-----

Only after the problem has occurred.

Mr. Aidan Carrigan

A resolution decision is triggered where the ECB, as the supervisor, draws attention to a resolution situation. The supervisor identifies a problem bank that needs resolution intervention and brings that to the resolution authority and it is only then the resolution authority gets-----

We will essentially have two supervisory mechanisms in place, one carried out by the single supervisory mechanism and probably a lighter version carried out directly by the European Central Bank through its agent in each of the countries at a lighter level.

Will there be heavy supervision and light supervision, depending on whether one is a significant institution?

Mr. Aidan Carrigan

I do not blame the Deputy for being confused because there is a whole new patchwork of European institutions.

I ask the question from the perspective of a layman.

Mr. Aidan Carrigan

First, on the supervisory front, there is the ECB as the single supervisor. It has responsibility for the supervision of all banks.

That is correct.

Mr. Aidan Carrigan

It takes direct supervision of 135 banks and does the rest through national authorities.

Could Mr. Carrigan give the figure again?

Mr. Aidan Carrigan

There are 135 directly supervised by the ECB and it is responsible for the supervision of all other banks through the national authorities.

The rest of the 6,000.

Mr. Aidan Carrigan

Yes, the rest of the 6,000. The national authorities do the day-to-day supervision in accordance with guidelines and rules from the single supervisory mechanism, SSM. The single supervisory mechanism can step in at any stage. That is the supervisory function.

While we are on it - to get the supervisory function out of the way - will there be two levels of supervision and will one type be more intense? By definition, if some of the institutions are more significant the risks attaching if something goes wrong are far more serious. Will there be two tiers of supervision between those that are being regulated under the current regime versus those that will come under the new single supervisory regime? Is Mr. Carrigan saying it is the same thing?

Mr. Aidan Carrigan

No. We would emphasise that there is a single supervisory regime. The regime will operate the rules set out in the capital requirements directive on liquidity, prudential, capital and other regulatory requirements. The single supervisory mechanism under the ECB is responsible for applying those rules fairly and equally across all banks but there is a proportionality principle underpinning that so that one would not have the same demands for low-risk small institutions as one would have for those with bigger risks.

Is Mr. Carrigan saying there are two tiers?

Mr. Aidan Carrigan

No, I am saying that proportionality would be applied in relation to assessing the risk. Our current national supervisor, the Central Bank, supervises on the basis of assessment of risk and applies a PRISM system and decides which banks need more attention. It would be the same at European level. There are not two tiers. Basically, we have a single supervisory mechanism responsible for supervising all banks in accordance with a common rule book across Europe but in some instances the day-to-day supervision would be carried out by the local supervisor in accordance with guidelines set by the single supervisor which has to oversee that and can step in at any time.

Will the day-to-day supervision of the institutions that will be under the SSM be carried out by staff from the SSM or the local central bank?

Mr. Aidan Carrigan

It will be a combination of both. The European single supervisor will operate-----

What level of staffing will the office have to monitor the 135 institutions?

Mr. Aidan Carrigan

That detail is being worked out by the ECB as it is gearing up to take over supervision in November 2014. It will rely on local supervisors and be working closely with them, even for the banks it directly supervises.

Funding is based on a percentage of deposits. Is there a case for those under the SSM regime to feel that because they are centrally and directly supervised that their risk of requiring a resolution would be reduced and that they should have to pay a lower percentage? If the risk of them requiring a resolution is no less than those that are not being supervised by the SSM, the question then is what is the value of the SSM supervision if it is not to reduce risk and identify problems earlier through the great supervision applied?

Mr. Aidan Carrigan

That is a reasonable question. The contributions to the fund will be risk based. It will depend on how risky one is assessed to be. Those institutions taking more risks will have to pay more into the fund. All institutions will benefit from the existence of the fund because it enhances financial stability and therefore means that with more confidence in the banking system, all banks will be able to raise funds on a cheaper basis and at the same cost.

Could Mr. Carrigan please go through that again because I got the impression earlier that it would be 1% of covered deposits but now Mr. Carrigan has said that it depends on the scale of the institution and the risk identified? Could he give us the range of contributions that will be required? I thought it would be a set percentage. I can understand a bigger institution would pay more because its deposits would be greater. It is a case of direct proportion. Will there be a different rate?

Mr. Cathal Sheridan

The overall target level is 1% of total covered deposits.

How is that to be split?

Mr. Cathal Sheridan

That will be determined on a national basis by the percentage of the business of the local bank compared with the overall level of activity in Europe. If it is a small bank and it represents 1% of the overall system then its contribution will reflect that percentage. Therefore, it will be proportionate and pro rata. As Mr. Carrigan mentioned, the contributions will also be risk based so pure deposit banks, which have less risk than big trading banks, will have a lower contribution. That will be reflected in the contribution they make. The Commission will introduce a series of delegated rules around how one determines what the appropriate contributions are. The general rules will be set out in this particular proposal and then the detail of it will be worked out.

Is what is being said that, on average, it will be 1% but it will vary from bank to bank?

Mr. Cathal Sheridan

The overall level will be 1%.

I got the impression earlier-----

Mr. Aidan Carrigan

That is the answer. I can read something for the Deputy from the Commission.

I know that the witnesses might think I do not understand but I am teasing out the issues. It now appears that because of their risk some institutions might get away with 0.5% and others might have a loading because they are involved in more risky lending and it could be 1.5%.

Mr. Aidan Carrigan

Even in the Commission’s own documentation it points out that if a bank is purely a deposit-taking bank it will be a very low contributor.

It could pay a fraction of 1%.

Mr. Aidan Carrigan

Yes.

Could Mr. Carrigan supply the committee with the ranges that are being considered?

Mr. Aidan Carrigan

We do not have figures.

What is the highest rate?

Mr. Cathal Sheridan

The overall level of contribution will be 1% of total covered deposits across Europe.

We have established that.

Mr. Cathal Sheridan

But the actual level paid by a particular institution will be determined by the type of business it is conducting and the risk of the business. The Commission will make a series of delegated Acts to determine more accurately the particular provision a bank will make. It is difficult at this stage to speculate what the range will be.

We do not know the range yet. Is there a suggested range?

Mr. Aidan Carrigan

The answer, as Mr Sheridan has stated, is that there will be further Commission legislation which will set out the exact parameters for the calculation of the rates. I might as well read into the record what the Commission outlined. It said the contributions will be calculated in a way that will reflect different types of bank and their business models. First, the contributions will be calculated in line with the draft bank recovery and resolution directive on the basis of criteria taking into account the amount of liabilities, minus own funds, and covered deposits of each bank and adjust it then to their risk profile. This means that banks which were financed almost exclusively by deposits would in practice have very low contributions. Second, contributions would be risk based, reflecting different risk inherent in different types of banking activity. That is the principle that is being reflected in the directive which sets out the legislative principles. There is another stage of level two legislation, delegated legislation, whereby the Commission will set out the exact criteria to be applied and it is only then that it will be clear what the range will be. The overriding principle is that the total of the fund will only equal 1% of the covered deposits of all banks in member states.

What is that expected to yield on the basis of current deposits?

Mr. Aidan Carrigan

We expect the fund to be around €55 billion to €60 billion after ten years. It will take ten years to build it up.

That would not have even covered the Irish banking problem.

Mr. Aidan Carrigan

The Irish banking problem was exceptional by European standards. No advance fund is ever set up to deal with systemic failures. The other additional factor since the Irish crisis is that the bank recovery and resolution directive established bail-ins and recovery procedures so there are a lot more steps to get through before one would get to a resolution being required.

I understand the bail-in.

To give a typical example here, would An Post's savings bank have to make a contribution? It is only a deposit-taking bank; An Post does not give out loans.

Mr. Aidan Carrigan

If what the Deputy is talking about is a credit institution under the CRD definition, and I think it is, it would be required to make a contribution.

What institutions in Ireland are likely to come under this resolution process?

Mr. Aidan Carrigan

All credit institutions and credit investment firms are covered. The exception in an Irish situation is the credit unions, which are not credit institutions under the definition.

Is there a list of those Mr. Carrigan could send to us? Is it a long list? Is it five or six, 25 or 26 or 100?

Mr. Greg Dempsey

That is on the Central Bank's website but currently there are about 25.

Would Mr. Carrigan send that to the committee tomorrow and we will circulate it to members?

Mr. Aidan Carrigan

We will have it sent in, yes.

On the risk-based issue, we have dealt with the 1% average. In terms of the risk, some people, and Mr. Carrigan or myself might not like the point to be made, would make the point that banks in Ireland carry a higher risk than a bank in Germany. In addition to the type of institution, it might be said that a bank in Greece or Ireland carries a potential greater risk and in view of the difficulties we have had so far, it would be silly not to examine that issue. Is it possible that a loading of some description or a higher contribution would be required for banks in certain countries by virtue of where most of their business is located?

Mr. Aidan Carrigan

The assessment of risk will be based on independent criteria and the criteria will be related to issues such as the quality of capital, the type of liabilities and the banking activities carried out by the bank. They will not be done on a national or country basis. One of the underlying principles behind this development is to break the link between the sovereign and the banks. The purpose of this directive is to bring in clearly defined criteria that will apply regardless of the country in which the bank is located. Obviously, there will be an assessment of the type of loans, the liabilities and-----

Those countries with safer banks or those that have proven they are safer countries in which to bank-----

Mr. Aidan Carrigan

That in itself will not be a criteria.

Yes. The safer countries will carry-----

Mr. Aidan Carrigan

One of the objectives is to create a level playing field across Europe to ensure that all banks are supervised-----

Mr. Aidan Carrigan

-----to the same level, have the same quality of capital and are assessed under the same criteria. The ultimate objective is that all banks should then be looked on equally by the markets in terms of their security or safeness. It depends on the risks and the activities they carry out.

Mr. Carrigan said that approximately 20 banks could come under this resolution regime; he can send that information on to us. How many banks in Ireland come under the single supervisory mechanism, SSM?

Mr. Aidan Carrigan

Five banks were announced by the European Central Bank.

And they are-----

Mr. Aidan Carrigan

They are AIB, Bank of Ireland, Permanent TSB-----

Is PTSB not part of AIB?

Mr. Aidan Carrigan

No. That is EBS.

I am sorry. I get confused.

Mr. Aidan Carrigan

Ulster Bank and Merrill Lynch in the International Financial Services Centre, which is-----

Mr. Greg Dempsey

On a final point of clarification, all Irish banks fall under the SSM but it is only the five that will be directly supervised.

Correct. I am getting the point now. In terms of contributions by the banks in the context of risk base, I suggest that a bank that is state owned should have a lower risk. For example, AIB is a state-owned bank whereas I would have thought that a bank owned by any state in the Union intrinsically would be of lower risk for resolution because for it to go to resolution not only would it have to fail, but its shareholder would have to fail it also, which is the state. The chances of a state-owned bank in that situation going to resolution would be less likely than one that is privately owned. Does Mr. Carrigan see a point in that regard?

Mr. Aidan Carrigan

The criteria to be applied here will not be based on state ownership or where the bank is located. They will be based on independent criteria looking at the quality of capital and the extent of risks. We would be expecting, as the financial crisis clears and financial markets settle again, that banks in temporary state ownership will be moving back into the private sector. It is the quality of the capital, the quality of the loan book and the riskiness of the activity that are expected to be the criteria.

Mr. Greg Dempsey

To some extent the bank recovery and resolution, BRR, directive, is about breaking the link with the sovereign. The fact that a bank is currently owned by a sovereign should not come into account because the assumption is that no further funds will be available from the sovereign in the event of failure. From that perspective, therefore, the bank's shareholders are somewhat irrelevant in terms of their propensity to fail.

Mr. Carrigan said earlier that after ten years this fund could have up to €55 billion. What has been the total cost to date in terms of the bank failures in Europe in the past six or seven years? How does that compare to the fund we are setting up for ten years time?

Mr. Aidan Carrigan

The Commission undertook an exercise to determine the target level. The figure for the entire European Union was €78 billion; that was determined to be the target level. The lower number represents the current membership of the SSM.

The lower number represents-----

Mr. Aidan Carrigan

It represents the fact that not all EU member states will be in the SSM.

Are all euro countries in the SSM?

Mr. Aidan Carrigan

Yes.

Mr. Carrigan is saying that for the euro area it is €55 billion.

Mr. Aidan Carrigan

Yes.

Whereas if it is done on an EU basis for the 27 member states it would be €78 billion, and some of the other ten not in the euro are free to come and join this if they wish.

Mr. Aidan Carrigan

They are, and where they are not joining they are required to build a target fund up to the same 1% target level.

Has the United Kingdom agreed to that?

Mr. Aidan Carrigan

It has at the Council level, yes.

How much will it put into its fund? That is relevant to us as we are so close to the UK.

Mr. Aidan Carrigan

The target level and the way the funds will be structured applies to all states and it will be set to 1% of covered deposits.

I know it is late but it is as well to tease this out. Mr. Carrigan might think I am asking layman's questions but I am deliberately putting them in that way because the people of Ireland need to know about this.

Mr. Aidan Carrigan

To finish answering the Deputy's first question, the Commission looked back at the crisis and considered that if the bail-in and other tools of the bank recovery and resolution, BRR, directive were available, based on the first cut of the proposal, how much was needed in a fund to cover the losses that would not have been absorbed by the bail-in. That is from where the number was derived.

If Mr. Carrigan is saying the €78 billion is a net figure on the basis of the bail-in, junior bondholders taking hits and so on, what was the gross cost of the banking failures over those years, assuming new measures that were not in place were in place, to arrive at the €78 billion? What figure did Mr. Carrigan start at to come to that?

Mr. Aidan Carrigan

The Deputy is asking very specific questions and we will have to come back to him on that.

Mr. Aidan Carrigan

The assessment in Europe was that this €55 billion will be sufficient to deal with future resolution situations. I bring the Deputy back to the point I made earlier that while we are looking at what happened in a financial crisis over recent years, we now have a completely different architecture to deal with those crises than we did in 2008. The architecture we have introduced involves bail-ins and there will now be a substantial bail-in from bank shareholders and creditors that will minimise any call on a fund vis-à-vis what had to be paid out in previous years when there were no such bail-in arrangements.

While the fund is set at an amount that would have covered the euro area cost to date, the likelihood of a call on the fund has diminished substantially owing to the need to bail in creditors and shareholders before one moves to that situation.

That sounds to me as if an arrangement has been put in place to prevent what went wrong the last time from happening again. Inevitably, the next crisis, if there is to be one, will be different and will not be a recurrence of what happened the last time. It is like a house that went on fire for which one puts in place a system to prevent what happened the last time from happening again but normally the next crisis is different.

Mr. Aidan Carrigan

The additional issue is that not only is the fund provided for at this amount, if the fund is exhausted and further funds are needed-----

It can borrow.

Mr. Aidan Carrigan

There is provision for the fund to borrow on the financial markets and elsewhere to top it up. A debate is under way and the European Council has pointed out that there is also a need for a backstop arrangement. Consequently, in addition to the moneys advanced to the fund, there will be a facility to borrow up to three times the size of the fund and there is a provision for a backstop arrangement to provide further support.

Who will provide the backstop?

Mr. Aidan Carrigan

The detail is still being discussed at European Council level.

Do not mind the detail; what institution will provide the backstop?

Mr. Aidan Carrigan

That has to be decided at European level. It is an issue to be discussed next week.

We are not there yet. If it is decided that an institution is to go into resolution, will it be somewhat like what happened here when KPMG was called in? Who physically will manage the resolution? Will it be one of the big four accounting firms? Mr. Carrigan should talk me through this process. I have read the sentence that should a national resolution authority not comply with the decision, the resolution authority commission could directly address executive orders to the credit institution involved. That is fine and I understand who will be covered by the direction. Who will do the job and make the €100 million available in the case of another bank resolution?

Mr. Aidan Carrigan

The single resolution mechanism, SRM, involves a single resolution board, SRB, which will be an authority. Essentially, it will be equivalent to the Central Bank or whatever else at a European level. The SRM will be the European supervisory mechanism and the SRB will be an organisation under the aegis of the European Commission which will be fully staffed to deal with the central single resolution function. It will work with national authorities on day-to-day resolution issues.

But I still do not know who will do the work of carrying out the resolution.

Mr. Aidan Carrigan

The single resolution board will be responsible for doing it.

Will it be hiring? That is like telling me that when the IBRC was liquidated, it was done by the Government. That is not the case, as the job was contracted out to somebody.

Mr. Aidan Carrigan

It will be hiring staff. I cannot comment on the contract or employment nature, but the board will be responsible to hire the resources to ensure it can carry out its functions under the directive, which means that it will be obliged to have a full-time complement carrying out resolution functions within the board.

Yes, it must have the authority to hire staff. However, it will not have staff in place because I hope they never will be needed.

Mr. Cathal Sheridan

It also will be able to use the staff of the local supervisor. That will be an integral part of the process because the local supervisor will be working with the ECB as part of the supervisory process. As they will be working together as a team, both will have an insight into the developing problem and an input into the process. There also will be a national resolution authority. The board obviously will make the decision and then both it and the national resolution authority will implement it.

That is a little like telling me that when it was decided to put the IBRC into liquidation, the supervisory authority knew some guy. The Central Bank is not involved in managing that process. Who physically will carry out the liquidation to which I am referring?

Mr. Aidan Carrigan

My colleague has just passed me a copy of the European Commission's impact assessment of this proposal. It anticipates the total number of permanent employees of the board will be approximately 240.

There will be 240 people.

Mr. Aidan Carrigan

These will be permanent staff, based in Europe. In addition, there will be the resources made available by the national authority. Consequently, one can see that there are plans for the creation of a substantial infrastructure.

The authority would not have the staff to carry out the resolution of a bank; 240 people would not cover it because they would also have their day job to do. My point is that it will be necessary to contract the work out to someone.

Mr. Aidan Carrigan

There will be 240 people in the resolution authority.

Yes, in the authority, but they will not be-----

Mr. Aidan Carrigan

Their job will be resolution.

I hope they will never have any work to do. Mr. Carrigan is suggesting they are somewhat like the fire brigade.

Mr. Aidan Carrigan

They will be engaged in recovery and resolution and assessing resolution plans. There will be a day-to-day assessment of the capacity of institutions to deal with a resolution. Under this provision, banks must have resolution capital, that is, capital that can be called on and absorbed to deal with losses in the future. They must have a resolution plan showing how they can deal with a resolution. The authority will be assessing the quality of the resolution plans on an ongoing basis.

In a case in which it is deemed that a bank must be part of a resolution, what call will the resolution board have on the auditors who signed the most recent financial statements? A question arose in Ireland as to the reason the auditors had not spotted it. Mr. Carrigan should talk me through this process. We cannot have some of the big global accounting firms issuing audit certificates and billing on the basis of a going concern only for a resolution to be required eight months later. I refer to people who certify the accounts are correct up to the previous quarter or whatever else. In Mr. Carrigan's opinion, should there be some call on those who were involved in certifying the institutions immediately prior to their entering a resolution? If not, why not? This is one lesson it is necessary to learn from what happened in Ireland. All institutions received fine audit reports right up until the day they became bankrupt.

Mr. Aidan Carrigan

That issue is not addressed directly in the detail of the European directive. However, I assume it is a matter for supervisors, national and European, to address.

If it is not to be included in the directive, no legislative provision will be made for it. From where will the legislative provision come on this subject? This is a matter on which the Government and its officials in the Department of Finance are working with the other governments. Forgive me if I am wrong, but one reason the delegates have come before the national Parliament is to get the views of the Parliament's relevant committee to inform their own views. Consequently, they are in attendance to hear the views of Parliament. I am giving them views that might not necessarily be those of the Government, but the precise reason for their attendance is to hear the views of Parliament; not the Government. As a Member of Parliament, I am putting this issue to them as one they should be considering.

Mr. Aidan Carrigan

I believe the answer is while I stated it is not being addressed in this directive, about which we are talking to members and on which we have prepared, auditors are obliged to operate within a legal framework that applies to them. If they fail to operate to the standards required of auditors, there are arrangements for dealing with this within the legislative framework in which auditors operate. That is a matter for company law. There is a European accounting directive, as well as various legislative mechanisms that require auditors to perform to a certain standard.

Members are aware that there is legislation to deal with these issues. However, I note that no auditor has as yet been held liable for some of the banking failures here. My point is that there have been banking failures in Europe where everyone agrees that a new resolution mechanism is needed to have in place a fund, funded by the industry, in order that taxpayers will not be caught next time around. That is a good lesson to learn. Surely, however, there is another lesson to be learned from what happened in the past. As the fund is being set up, it is accepted that this could happen again. One past failure was that the auditors certified accounts as being true and fair almost right up until the end. As part of this process, there should be new rules to deal with that issue. If one suggests this is not an issue, one is suggesting there is no need to learn lessons about that aspect of what went wrong.

I will conclude with one last point. I acknowledge it is late on a Thursday evening.

If there is no provision in these new procedures whereby directors who are guilty of fraudulent or negligent activity can face criminal prosecutions, we are saying to everybody, "Carry on regardless". We know what happened in Ireland. Most of them got off. I will not comment on any cases. If there is a situation where a bank requires resolution, the question is whether this legislation will include provisions for legal sanctions against such persons. I am not only talking about barring them from future directorships. Will there be a mechanism in place where they can be brought to account? It is not fair on the customers of the banks who will pay, not ultimately but initially, for this fund. They should at least have the satisfaction of knowing that about the directors of those institutions whose work, if careless or negligent, results in their banks having to be liquidated and go through the resolution process. From an Irish perspective, having been through more of the pain involved than most other EU countries, we have probably one of the richest perspectives to bring to this debate. One of the lessons that we have learned is that those who caused the problem should be accountable.

If there are not mechanisms in this, it is all well and good to propose the setting up of a fund and if a bank misbehaves again and goes bust at least there is such a fund. That is fine in so far as it goes but it is not fine that the directors feel there is no sanction against them. I want to know what sanctions - whether they are legal and court sanctions - can there be against the directors of institutions. Some of them might merely be due to trading circumstances or where there is a fraud committed against them. Some of it may not be their fault, if an institution goes down. It could be due to matters outside their control. If there is a Ponzi scheme being operated by some directors of some bank, one would need to know this mechanism is not merely a method of bailing out or having a fund in place to pick up the problems. Those who caused the problem should be brought to book. What provisions are in the proposal in that regard?

Mr. Aidan Carrigan

Deputy Fleming has raised a fair comment which has been addressed in the regulation here.

Mr. Aidan Carrigan

There are general principles governing resolution set out within the proposal. They provide that the shareholder of the institution bears first losses. Creditors of the institution bear losses after that. Significant to what the Deputy raises then is that the management of the institution under resolution is replaced, excepting, where it is required, in whole or in part, to manage the resolution process.

I understand that.

Mr. Aidan Carrigan

Furthermore, in accordance with the due process of law, individuals and entities are held accountable for the failure of the institution under resolution to the extent of their responsibility under national law.

That is the point. Mr. Carrigan has answered my question. As he stated, under existing law, the term is "the due process of law". From what I heard from him, this process is not proposing any new laws at all.

Mr. Aidan Carrigan

It is setting out the principle that they are to be replaced and then that they are to be dealt with under due process of national law. It is not setting out a new sanctions framework in this regard.

Is there a section requiring states to pass new legislation? The lesson we learned is that under current legislation nobody seemed to be guilty of anything and yet some of the banks cost a great deal to bail out. It was a foregone conclusion to tell them that they were losing their jobs. I do not see anything in it about losing their salaries or future entitlements from the bank, or their pensions. They merely lose their job.

The legislation is not satisfactory. If we have learned anything and if we are to be strict on the banks, I am worried about the moral hazard. I have gone full circle from where I started. If this fund is in place, somebody will feel that there is an insurance policy or bond in place and if they take a chance, it works, and so what if it does not. The person will feel he or she will be out on pension anyway and there is a fund to pick up the pieces. We are putting a safety net under them, yet we are not putting in place any new legislation to deal with their maladministration. In the public service, one will be familiar with the phrase "maladministration". If somebody maladministered their job, it might not be a criminal offence today but, perhaps this process needs to be looking at some new mechanisms to deal with those persons.

Mr. Greg Dempsey

On a couple of points, if I may,-----

Do the officials follow my train of thought?

Mr. Greg Dempsey

-----the fund exists but before it can be accessed there is a requirement that 8% of the size of the balance sheet has to be bailed in first. It is a safety net, but only after there has been quite a substantial bail-in of 8%. Even then, the use of the fund, is limited to 5% except in very extraordinary exceptional circumstances.

Five per cent of what?

Mr. Greg Dempsey

The size of the liabilities on the balance sheet. Those levels of bail-in were imposed such as to reduce the moral hazard of having a fund that persons might perceive as being available.

The directive itself has as its objective to reduce the incidence of failure and where they do occur, ensure that the creditors and owners take the losses rather than taxpayers. That is what it strives to do. Were we to have introduced elements dealing with blame and sanctions for creditors into this directive, we might have taken away from what its primary objective was. Instead, it only refers to existing national legislation and then concentrates on the three pillars of prevention, intervention and resolution.

Is there no new legislation proposed to deal with it?

Mr. Aidan Carrigan

There are limits to the extent that we can deal with this today because we are here dealing with this single resolution mechanism. The capital requirements directive dealt extensively with the corporate governance requirements in financial institutions and dealt with issues around directors. The area of company law deals with directors' responsibilities, etc. That varies somewhat been member states and as far as this regulation goes, it refers to this issue being dealt with within the capital requirements directive and national law.

Mr. Dempsey mentioned the owners and shareholders taking losses. They all took a 100% loss on the Irish banks as well but it was not enough. They all lost. For anyone who had shares at €15 or €16, these were ending up at 11 cent. That was a complete loss as well. There is nothing new in shareholders taking a loss in a resolution situation.

It is late and I will leave it at that.

I might as well ask one or two quick questions. On the firewall fund, I did a quick calculation. If one can gear that up by three times its value, one is probably talking about €180 billion. It was stated there would be another firewall. What does the Department anticipate will be the total firewall on this fund?

Mr. Aidan Carrigan

The Acting Chairman is asking about the details of the backstop arrangement which would be there and the backstop arrangement is still a matter for discussion. In the Council conclusions in 2013, the Heads of State made it clear that this supervisory mechanism must be backed by an effective backstop. The details of that - whether it will be the ESM or some variation on it, and how it will apply because this provision only applies to the euro area members and there will have to be an equivalent backstop for non-euro area members - is still being worked out.

The final point, I suppose, goes to the heart of the matter. The biggest issue in Ireland was the cost to the taxpayer, the ordinary person. The banks themselves did not have the capital to soak up the losses. The SRM proposal, which talks of eliminating taxpayers' exposure, appears to indicate that the state-aid procedures will run in parallel. The bottom-line question is, under the resolution mechanism, will the Irish taxpayer have an exposure in the future if an Irish bank fails or requires support?

Mr. Aidan Carrigan

The objective of this mechanism is to minimise that exposure by the maximum amount possible. We can never say never because, as the Deputy was saying, we cannot anticipate exactly what will happen. However, if we go through the procedures, we will note the exposure has been reduced to what we regard as very close to minimal in this case, subject to further details being worked out in regard to backstop arrangements.

What is the rank of the taxpayer if an institution gets into trouble?

Mr. Aidan Carrigan

The arrangement under the bank resolution directive is that the shareholders are first, after whom follow the junior bondholders. Senior debt is absorbed up to a maximum of 8% of the total-----

Mr. Greg Dempsey

I will run through it. The losses are absorbed in accordance with the normal insolvency hierarchy until they are fully absorbed. First are the shareholders, and they are followed by junior debt, all senior debt, bondholders and other creditors. If there are still losses, we move to deposits and, ultimately, we could get to retail deposits. Eventually, we would reach covered deposits but, of course, they will not be bailed in. However, the DGS fund would cover it. However, because it would be preferenced, it is pretty unlikely we will get there. After we have absorbed losses up to 8% of the balance sheet, we can, instead of imposing losses at whatever level we have got to at that stage, look to the fund for an amount equal to 5% of the institution's balance sheet. After 5% has been provided by the fund, and in exceptional circumstances-----

Mr. Greg Dempsey

Eight per cent of the balance sheet, and a further 5%.

Mr. Greg Dempsey

Yes. After that, we can continue to bail in or we could look to this backstop. Nowhere in that process has the taxpayer been called upon. The concept is to keep bailing in until the losses are absorbed.

Mr. Aidan Carrigan

There is a specific provision in this resolution proposal that there should be fiscal safeguard provisions so no decision concerning a resolution will have an impact on the fiscal situation in member states. The provision was reviewed by Council legal services, which actually asked that those provisions be strengthened further to make it very clear that the resolution process will not have an impact on national budgets.

If an institution got into financial trouble and the member state in question had major financial issues, perhaps concerning its ratio of debt to GDP or level of debt, would that state be more likely to have access to the ESM than a country with a similar type of institution that is financially sound and has lower levels of borrowing?

Mr. Aidan Carrigan

Again, we are straying from the core issue.

Mr. Aidan Carrigan

We are straying into the ESM debate that is under way. However, I can say-----

But that is the backstop for this.

Mr. Aidan Carrigan

In regard to the resolution, I believe the Deputy is pointing out to me that some member states might be stronger and in a better position to intervene. That issue has been addressed by an amendment to the state aid rules. A national resolution fund was deemed as state aid and the thinking in this regard has been extended by the European Commission to stipulate that any payment out of the European resolution fund will also be treated as state aid. That will require the kind of restructuring and downsizing we have seen, or the kind of conditionality that is applied to state aid. Even when a strong country chooses to intervene with its own resources, it will still be subject to the guidelines on state aid related restructuring of the institution concerned-----

Do deposits still rank pari passu with senior debt?

Mr. Aidan Carrigan

Under the resolution, there is depositor preference. They are treated preferentially.

Does Mr. Carrigan expect that this will go through ECOFIN or, rather, the SRM next Friday?

Mr. Aidan Carrigan

All I can say at the moment is that the Lithuanian Presidency is presenting it as something it would like to see completed at the ECOFIN meeting. There are still a large number of open issues to be resolved. There will be a lot of work for Ministers concluded at this ECOFIN but the objective of the Council is to have it concluded by the end of the year.

In layman’s terms, beginning with the SRM, one goes down through the rankings in terms of shareholders and then works down through the normal procedures. Then one gets to a point at which the ESM is effectively a backstop fund for a resolution mechanism. Is that a fair comment?

Mr. Aidan Carrigan

That has yet to be agreed or decided.

Mr. Aidan Carrigan

Something equivalent to that is anticipated or expected.

I thank Mr. Carrigan and his officials for the briefing. It will very much add to our understanding of the issue.

The joint committee adjourned at 7.15 p.m. until 10 a.m. on Wednesday, 13 November 2013.
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