Dáil Éireann Debate, Tuesday - 20 February 2018
141. Deputy Pearse Doherty asked the Minister for Finance if an alternative rule based on a minimum investment grade for bank bonds will be put in place of the current severe restrictions on credit unions investing in bank bonds; and if he will make a statement on the matter. [8153/18]
Amharc ar fhreagraIn 2017, the Central Bank undertook a review of the investment framework for credit unions. In May 2017, consultation paper 109, CP109, was published which consulted on a number of potential changes to the investment framework. CP109 outlined the Central Bank’s view that any changes to the investment framework for credit unions should reflect the fact that it is the savings of credit union members, which can be withdrawn on demand, that will be invested by credit unions and that the risk profile of credit union investment portfolios should reflect this.
Taking account of the resolution framework introduced under the Banking Recovery and Resolution Directive, BRRD, CP109 outlined an intended change to the definition of bank bonds to clarify that bonds that are subordinated to any unsecured creditor including senior bank bonds issued by a credit institution do not fall within the definition of “bank bonds” set out in the regulations. It also outlined that credit unions will need to ensure that they confirm that instruments are not subordinated debt instruments prior to making an investment to ensure that they remain in compliance with investment regulations.
On 1 February 2018, the Central Bank published the feedback statement on CP109 and amending investment and liquidity regulations for credit unions. These amending regulations will commence on 1 March 2018. These regulations reflect a change to the definition of bank bonds which precludes investment by a credit union in bonds that are subordinated to any other liability of a credit institution, including senior bank bonds, in recognition of their risk profile and complexity. This preclusion for credit unions reflects the potential implications for credit unions should such instruments be written down or converted to equity upon the failure of a credit institution.
Credit unions will continue to be permitted to invest in senior bank bonds and the Central Bank understand that a number of European credit institutions are likely to continue to issue senior bonds. Additionally, as minimum requirement for own funds and eligible liabilities, MREL, ‘buffers’ are established it is expected that domestic credit institutions will resume issuance of senior bank bonds in the future given the lower associated funding cost relative to subordinated bank bonds.
The Central Bank has informed me that, notwithstanding the credit rating of bank bonds generally, it is not deemed appropriate for credit unions to be holders of instruments such as subordinated bank bonds specifically designed to absorb losses in a resolution scenario as it would directly expose them to burden sharing in line with EU Commission policy[1] , and has consequences for the resolvability of issuing credit institutions raising the risk of taxpayer bail outs.
[1] Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis, ‘Banking Communication’ (2013/C 216/01).
