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How the new banking bill alters the landscape of Irish banking

PRACTICE AREA GROUP: Banking and Financial Services
DATE: 01.09.2011

The Central Bank and Credit Institutions (Resolution) (No. 2) Bill 2011 (the 'Bill') seeks to establish a more permanent and wider framework for dealing with insolvent banks and banks in financial difficulty.

The Bill affords more powers to the Central Bank of Ireland (the 'Central Bank') to intervene where an authorised credit institution is failing. With High Court approval, the Central Bank can:

  • make special management orders;
  • temporarily transfer assets and liabilities to a bridge-bank;
  • petition the court to wind-up a failing institution; and
  • direct a recovery plan and resolution plan.

The Bill also envisages the establishment of a fund to resolve financial instability, to which all authorised credit institutions would contribute.

The Bill within a wider framework

The Credit Institutions (Stabilisation) Act 2010 (the ‘Stabilisation Act’) provided for the immediate restructuring of Irish banks as required under the EU/IMF Programme for Ireland. The Bill will replace and extend the Stabilisation Act when it expires on 31 December 2012. Interestingly, until the lapse of the Stabilisation Act, the relevant institutions under that Act will not be affected by the Bill. The Bill also replaces the Central Bank and Credit Institutions (Resolution) Bill 2011 of February 2011 which lapsed with the dissolution of the 23rd Seanad on 26 April 2011.

Application of the Bill

All licensed banks, incorporated building societies and registered credit unions in Ireland fall within the ambit of the new legislation, in contrast to the Stabilisation Act which referred only to those banks which had received financial support from the State. The Bill focuses on those institutions which are failing or which are likely to fail. The Bill, in seeking to provide a resolution regime for credit institutions experiencing difficulties, forms part of the larger programme for Government which seeks to restore public confidence in the State’s credit institutions and to protect the stability of the financial system as a whole.

Central Bank of Ireland

The main provision of the Bill affords increased powers of intervention to the Central Bank. The Bill provides that the independence of the Central Bank and its Governor will not be affected by the Bill, and that endeavours should be made to separate such intervention from the regulatory and supervisory responsibilities of the Central Bank so far as possible.

Conditions of intervention

The Central Bank, having consulted the Minister, may exercise its powers to intervene in a variety of circumstances, where the Central Bank is satisfied that either:

(a) a credit institution has failed to comply with a direction of the Central Bank to resolve concerns relating to its financial stability, or where the credit institution is incapable of carrying out the direction, or where a direction is insufficient given the urgency of the situation;

(b) there is present an imminent serious threat to the financial stability of the credit institution or of the financial system of the State.

The Central Bank may also intervene where:

(c) there is a failure to meet a regulatory requirement or condition of its licence or authorisation; and

(d) the immediate winding up of the credit institution would not be in the public interest.

Credit Institutions Resolution Fund

The Bill also provides for the establishment of the Credit Institutions Resolution Fund (the 'fund') which can be drawn on to relieve financial instability or an imminent and serious threat of instability. Contributions will be made to the fund by the relevant authorised credit institutions by way of a levy. The Minister for Finance (the 'Minister') may make contributions, for which the Minister is entitled to be reimbursed.

The Central Bank will not contribute to this fund but will manage and administer it and determine the rate of interest payable. The Bill makes contribution to the fund a precondition to an institution carrying on business in Ireland. The contributions required will be determined by the Minister, who will also make provision for the administration and operation of the fund in consultation with the Central Bank.

Bridge-banks

The Central Bank may establish 'bridge-banks' to hold assets and liabilities of institutions in financial difficulties on a temporary basis with the aim of transferring the assets and liabilities to a third party under a transfer order. This is to allow the failed institution to function while a feasible long term plan for the institution is devised.

Bridge-banks will be formed and registered as private limited companies wholly owned by the Central Bank and funded through the fund. Such bridge-banks will also be taken to hold a banking licence.

Transfer orders

The Central Bank may make a transfer order in relation to an authorised credit institution if the intervention conditions (as set out above) are satisfied and it deems it necessary. The Central Bank is required to give notice to the affected institution, but may also apply to the High Court on an ex parte basis in exceptional circumstances.

The Central Bank may also apply to the High Court to vary the terms of a transfer order or to set it aside. If it is set aside, the transferee’s rights or title to the transferred assets or liabilities are not impacted, save where the transferee is a bridge-bank.

Special Management Orders

Special Management Orders ('SMOs') may be made where the conditions of intervention set out in the Bill are met and where the Central Bank considers it necessary. Under such an order, the Central Bank appoints a suitably qualified person (a 'special manager') to take over the management of the institution, subject to the approval of the High Court. Notice of the SMO is required but may be waived on the grounds that there is a risk of significant damage to the stability of the institution or the financial system, or where the Central Bank believes that confidentiality would not be maintained, with such a breach resulting in significant adverse consequences. The High Court must approve the proposed SMO in ex parte proceedings brought by the Central Bank.

The authorised credit institution may apply to have the SMO set aside by the High Court. The High Court may comply with this request where the Central Bank has contravened the provisions relating to notice, where the decision to issue a SMO was unreasonable or where it is vitiated by an error of law.

The special manager is afforded extensive powers under the Bill including the power to manage the credit institution, to wind it down or to implement a recovery plan. The special manager is empowered to employ or dismiss persons and to apply to the High Court to determine any question arising from their management of the institution.

The consent of the Central Bank is also required before proceedings or a resolution for the winding up of a company can be instituted, or where an examiner, receiver or inspector under the 1990 Companies Act may be appointed, or before a judgement against it can be enforced.

Liquidation

The Central Bank must present a petition to the High Court to initiate liquidation proceedings in relation to an authorised credit institution; the Bill provides that this is the only manner in which an authorised credit institution may be liquidated unless the Central Bank has received ten days’ notice of the petition of another person and that the Central Bank has raised no objection. Only a liquidator approved by the Central Bank may be appointed.

The liquidator is stated to have two objectives; to protect the deposits of eligible depositors and to wind up the affairs of the credit institution with a view to securing the best deal for its creditors. Should these objectives conflict, the interests of the depositors will take preference over those of the creditors, but the liquidator would strive to achieve both objectives in conjunction with the Central Bank.

The Bill also provides for the establishment of a liquidation committee after the issue of the winding-up order to oversee the exercise of the liquidator’s functions. The liquidator shall report to the committee, and the committee will make recommendations on appropriate ways of achieving this objective, with which the liquidator must comply.

Recovery plans and resolution plans

The Central Bank will be able to implement and direct the recovery plan of an affected credit institution to facilitate the continuation of its business or of part of its business, having regard to the nature of that business where financial instability threatens that institution. This allows the Central Bank to prepare for a contingency plan should a recovery plan fail. The Central Bank is allocated the powers necessary to gather the information and analysis required for the preparation of the plan.

Credit Institutions Winding Up Directive

Importantly, the Bill is deemed to have effect in accordance with the Credit Institutions Winding Up Directive (Directive 2001/24/EC), which means that orders constituting reorganisation measures will be legally enforceable in all Member States of the European Union.

Concerns

The Bill extends and replaces the Stabilisation Act and provides the legislative framework for an effective and expeditious regime to deal with the restructuring and reorganisation of credit institutions experiencing financial difficulties. As a measure intended to restore public confidence in the banking system, it affords extensive powers to the Central Bank instead of the Minister for Finance. However, it is submitted that the application of the Bill in practice will raise issues. First, the precedence afforded to unsecured depositors over secured creditors in relation to the objectives laid out in the liquidation procedure concerning authorised credit institutions may raise concerns. Second, the obligations on the banks to contribute to the fund may be severely tested. Finally, judicial review in relation to the provisions of the Bill is limited. While certain timescales for review are laid out in the Bill, the decision of the High Court is final unless the Court deems that the matter is one of such importance where the public interest demands review of the matter to the Supreme Court.

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