## _cr16313 — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr16313 — EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16313.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16313.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16313.pdf.json) --- ### Overview and Banking Union context - Single rulebook and Banking Union transformed the Irish framework for dealing with failing banks: strengthened supervision, harmonized prudential rules, established a uniform bank resolution regime, and built supporting arrangements for euro area implementation. - BRRD strengthened the resolution regime in Ireland and the EU and is closely aligned with the Financial Stability Board’s Key Attributes. - Key Banking Union elements: - Single Supervisory Mechanism (SSM): prudential supervision, early intervention, and recovery planning for euro area banks placed under the European Central Bank (ECB) as of end-2014. - Single Resolution Mechanism (SRM): became effective as of January 2016; Single Resolution Board (SRB) assumed direct responsibility for resolution planning and decision-making for ECB-supervised and certain pan-European banks, and for managing the Single Resolution Fund (SRF). - Remaining challenges: - Complex decision-making arrangements in SSM and SRM may impede timely intervention. - Unresolved roles of SRB and ECB in systemic crisis preparedness and management. - Absence of agreement on euro area-wide deposit insurance or a common permanent fiscal backstop for the SRF. ### Recovery planning, early intervention, and resolvability - Progress and status: - Irish authorities progressed on resolution planning and favor proactive preparedness despite transfer of competence to the SRB. - All four Irish SIs (AIB, PTSB, BOI, UBIL) have submitted full scope recovery plans and received feedback from JST by end-March 2016; next submissions due by September or December 2016. - No Irish bank received notice of a material deficiency since recovery planning commenced in Ireland. - Resolvability measures needed: - Make critical service provision more robust. - Ensure adequate financing in resolution. - Enhance bank IT systems to allow rapid valuation and granular loan-level information. - Constraints and transitional issues: - Building adequate loss-absorbing buffers takes years. - BRRD MREL supports an 8 percent rule: at least eight percent of total liabilities of the bank (including capital) are used for loss absorption before SRF or other public funding could be used. - Decision not to transpose BRRD government stabilization tools in Ireland and the minimum eight percent rule could constrain handling of systemic cases. - Flexibility to use BRRD transfer powers may be constrained by strict interpretations on use of deposit insurance funds and uncertainty over departure from pari passu treatment of creditors outside bail-in. ### Funding in recovery and resolution (MREL, SRF, ESM) - MREL: - Require adequate MREL issuance by Irish banks at appropriate levels within the company to make resolution plans more effective (Timing: MT). - EBA draft RTS defines MREL elements: (i) loss absorption and (ii) recapitalization; loss absorption derived first from minimum capital requirements including pillar 2 and the combined buffer. - Single Resolution Fund (SRF): - SRF owned and administered by the SRB; goal: reach at least one percent of covered deposits in the Banking Union (approximately €55 billion) by end-2023. - National compartments accumulated during build-up period; 40 percent mutualization starting in 2016; full mutualization at end of build-up period. - SRF may be used only to ensure effective application of resolution tools; SRF use constrained by eight percent bail-in requirement and a SRF cap of the lesser of five percent of bank’s total liabilities or SRF means plus ex post contributions over three years. - Irish LFA currently negotiated; transitional credit lines available as last resort. - European Stability Mechanism (ESM): - ESM lending cap €500 billion; paid-in shares €80 billion and €620 billion of callable shares. - Direct recapitalization instrument adopted December 2014, up to a maximum of €60 billion. - ESM assistance conditional on eight percent rule and SRF five percent contribution being met; prior indirect recapitalization used (e.g., €41 billion to Spanish banking sector). - Funding constraints and transition risks: - Eight percent bail-in requirement may create transition risks if MREL not in place. - EBA draft RTS contemplates zero recapitalization amount for banks with liquidation as PRS, posing risks if liquidation infeasible due to contagion. ### Supervision under the SSM and JST arrangements - SSM allocation: - ECB directly supervises four Irish SIs: AIB, PTSB, BOI, and Ulster Bank of Ireland (UBIL). - Four SIs account for roughly 58 percent of total domestic assets and 72 percent of total customer deposits. - Remaining 13 banks are LSIs, directly supervised by the Central Bank of Ireland as NCA under ECB oversight. - Joint Supervisory Teams (JSTs): - JSTs led by ECB coordinators, include sub-coordinator and NCA staff; undertake day-to-day supervision and recovery plan assessment for SIs. - Within six months from submission JST must communicate required recommendations; material deficiencies require revised plan in two months, extendable by one month. - Recovery plan assessment: - Key issues: need to calibrate specific key indicators and recovery actions and make them implementable, particularly regarding shared critical services. - EBA issued detailed RTS on recovery plans; significant work remains for banks to conform. ### SRM structure, national resolution capacity, and resolution planning in Ireland - SRB responsibilities and status: - SRB has direct responsibility for resolution planning and decision-making for all SIs directly supervised by the ECB, cross-border banks in the euro area, and LSIs where SRF use is required. - SRB assumed responsibilities in January 2016; planned to hire approximately 110 staff during 2016. - SRB concluded MoUs with ECB and cooperation agreement with the European Commission; chairs CMGs while ECB chairs CMG recovery topics. - Irish NRA and capabilities: - Central Bank of Ireland resolution division: twelve staff split into two teams; another seven positions to be filled in 2016. - Panels of private sector experts available; supplemental staff from other divisions may be designated for resolution implementation. - Transitional PRS and RAP documented in 2015 for AIB, BOI, and PTSB; full resolution plans to be prepared during 2016 under SRB guidance. ### Entry into resolution, valuation, decision-making timelines, and the role of courts - Valuation: - Independent valuation of failing bank’s assets and liabilities required prior to entry into resolution by Central Bank of Ireland or SRB; provisional expedited process exists but may still be time consuming. - Timely valuation identified as a potential impediment; need for granular loan-level data emphasized. - Decision-making and timelines (SRB jurisdiction): - ECB determines failing or likely to fail (first condition); SRB determines second and third conditions and prepares resolution scheme transmitted to EC. - EC must validate resolution scheme within 24 hours; EC may involve European Council within first 12 hours on SRF use or public interest challenges. - Resolution scheme enters into force 24 hours from transmission if no objection by Council or EC; cannot be implemented by NRAs until EC adopts positive or conditional decision on internal market compatibility and State aid. - SRB instruction leads NRA to prepare proposed resolution order; Central Bank of Ireland must obtain written consent of the Minister where proposal has direct fiscal impact or systemic implications. - Judicial review and timing constraints: - Under IRL BRRD Regulations, Central Bank prepares a proposed resolution order and applies to the High Court for prior ex parte approval; court must be satisfied PRO is reasonable and not vitiated by error of law. - Within 48 hours of order, bank, shareholder or creditor may apply to set aside order; remedies limited to monetary damages if invalidation would prejudice third parties. - Application for judicial review generally must be submitted within 10 days of notification. - Rebuttable presumption against stay or injunction pending set-aside; stay only where application made on notice and substantive action likely to succeed. - ECJ may review SRB decisions ex post and could declare SRB decisions void or suspend implementation, potentially affecting national actions. ### Legal constraints: pari passu, exclusions, and national insolvency - Bail-in and write-down: - BRRD permits write-down/convert of capital instruments and a bail-in tool; Central Bank of Ireland may write down/convert liabilities. - NCWO principle applies; if breached compensation should be paid from SRF, subject to eight percent requirement. - Departures from pari passu: - Flexibility to exclude liabilities from bail-in is constrained; BRRD allows limited departures for operational reasons or to prevent contagion. - EU and Irish legislation do not explicitly allow departures from pari passu for sale of business or bridge institution tools; lack of express authority may give rise to legal challenges. - National insolvency and liquidation: - Part 7 CBCIR covers liquidation and gives Central Bank exclusive competence to permit winding-up; liquidator objectives: (i) facilitate DGS prescribed payouts or transfers, (ii) wind up to achieve best results for creditors as a whole. ### Cross-border coordination, resolution colleges, and third-country issues - Resolution college framework: - GLRA responsible for creating resolution college for banks with presence in more than one member state; SRB replaces NRA as GLRA for Banking Union participants. - Resolution colleges discuss MREL setting, RAP, and resolution plans; EBA publishes guidelines but has no voting rights. - UK and third-country coordination: - Irish SIs maintained important links to the UK: AIB has 30 branches and 21 business centers in the UK; for 2015, 44 percent of BOI’s loan portfolio was booked in the UK subsidiary; UBIL significant subsidiary of RBS. - BRRD approach to third countries: third-country authorities may be invited as observers in European resolution colleges but have no voting rights; recognition and enforcement of third-country resolution measures is discretionary and may be refused on limited grounds. - As of report time, no European resolution colleges had been established in the EU; Central Bank of Ireland is identifying members for a European resolution college for Citibank Europe plc and entering into MoUs with U.S. and Swiss authorities. - Recognition and grounds for refusal: - BRRD Articles 94 and 95 outline discretionary recognition; grounds to refuse include adverse effects on financial stability, inconsistent treatment of depositors, material fiscal implications, or conflict with national law. ### Deposit insurance, DGS operational readiness, and EDIS - DGS and DGSD: - DGSD transposed into Irish law November 2015; preserves €100,000 protection and extends coverage; requires ex ante target level of at least 0.8 percent of covered deposits by July 3, 2024. - As of March 31, 2016, scheme covered 374 credit institutions and €89 billion of covered deposits. - Banks required to provide a Single Customer View and depositor data files within 72 hours of request. - Operational timing: - Current statutory DGS payout timing: 20 working days; DGSD reduces to 7 days by 2024. - Recommendation: public commitment to seven-day payouts earlier than DGSD deadline, ideally by 2018. - DGS funding and legal constraints: - Strict interpretation of Article 109 (least cost principle) may constrain DGS ability to fund resolution; recommendation to allow DGS to disburse greater funds upfront if estimated final net cost would be lower than net liquidation costs. - European Deposit Insurance Scheme (EDIS): - EC proposed EDIS for Banking Union members by 2024: Stage 1 reinsurance, then co-insurance after three years, full mutualization by 2024. - Some members have reservations about level playing field, insolvency differences, banks’ sovereign exposures, and cross-border loss transmission. ### Systemic crisis management, Principals’ Group, and simulation exercises - Principals’ Group: - Interagency coordinating committee comprised of senior officials from DoF, Central Bank of Ireland, and National Treasury Management Agency; no legislative mandate or published TOR presently (one reportedly being prepared). - Recommendation: issue and publish terms of reference for the Principals’ Group regarding systemic crisis management (Timing: Immediate). - Simulation exercises: - No crisis simulation exercises since 2007; recommendation to recommence simulation exercises reflecting complex new environment and SRB-planned exercises (Central Bank may participate if invited). - Roles of SRB and ECB: - Recommendation to define roles of SRB and ECB in planning for and managing systemic crises (Timing: NT). ### Main recommendations and timing (from Table 1) - Orderly and Effective Resolution - Continue to identify and address impediments to resolvability. Timing: Ongoing - Remove requirements for ex ante court approval of resolution measures or specify a short timeframe (24 hours) for the court to make its determination. Timing: NT - Allow for accelerated SRM decision-making arrangements. Timing: MT - Clarify that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools. Timing: Immediate - Funding Recovery and Resolution - Commit publicly to seven day DGS payout, ideally by 2018. Timing: NT - Require adequate MREL to be issued by Irish banks, at the appropriate levels in the company, to make resolution plans more effective. Timing: MT - Establish permanent standing and joint public back-stop for the SRF. Timing: MT - Allow a more flexible use of DGS to fund resolution tools. Timing: NT - Implement an SRM-wide deposit insurance scheme. Timing: MT - Systemic Crisis Management - Issue TOR for the Principal’s Group with respect to its role in systemic crisis management. Timing: Immediate - Recommence simulation exercises. Timing: Immediate - Define the role of the SRB and ECB in planning for and managing systemic crises. Timing: NT - Timing legend: Immediate: within 1 year; NT–near term: up to 2 years; MT–medium term: 2–5 years. ### Selected facts from the Irish crisis context (preserved figures) - Banking sector size by 2008: 520 percent of GDP. - Government guarantee on September 30, 2008: €375 billion covering seven participating banks. - NAMA purchases: €74 billion in loans at a price-to-book value of 43 percent; funded by €30 billion of ECB eligible, government-guaranteed senior notes and €1.6 billion of unguaranteed subordinated notes. - PCAR findings: March 2010 identified €31.6 billion of additional capital needs; March 2011 bottom-up PCAR identified a further €24 billion capital shortfall. - ECB and Central Bank of Ireland liquidity support reached over €170 billion at year end 2010. - Capital injections related to guarantees: €80 billion of new capital injected into banks covered by the Irish guarantee; €64 billion provided by the Irish state and €15.5 billion from the private sector including subordinated debt holders. - Final net cost of the Irish government’s bank bailout recently estimated at €40 billion. *Source: IMF staff report, “Ireland — Executive Summary” (content unit: _cr16313 - EXECUTIVE SUMMARY).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Overview - The introduction of the “single rulebook” and the Banking Union transformed the Irish framework for dealing with failing banks, strengthening supervision, harmonizing prudential rules, establishing a uniform bank resolution regime, and building supporting arrangements for euro area implementation. - The Bank Recovery and Resolution Directive (BRRD) strengthened the resolution regime in Ireland and the EU and is closely aligned with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions. - Key Banking Union elements: - Single Supervisory Mechanism (SSM): prudential supervision, early intervention, and recovery planning for euro area banks placed under the European Central Bank (ECB) as of end-2014. - Single Resolution Mechanism (SRM): became effective as of January 2016; Single Resolution Board (SRB) assumed direct responsibility for resolution planning and decision-making for ECB-supervised and certain pan-European banks, and for managing the Single Resolution Fund (SRF). - Remaining challenges: complex decision-making arrangements in SSM and SRM that may impede timely intervention; unresolved roles of SRB and ECB in systemic crisis preparedness and management; absence of agreement on euro area-wide deposit insurance or a common permanent fiscal backstop for the SRF. ### Recovery planning, early intervention, and resolvability - Irish authorities have progressed on resolution planning and favor proactive preparedness despite transfer of competence to the SRB. - Single point of entry (SPE) bail-in strategies are being explored for systemic banks; these require issuance of subordinated debt to senior liabilities and remain untested in Ireland. - Enhancing resolvability requires additional reforms, including: - Making critical service provision more robust. - Ensuring adequate financing in resolution. - Enhancing bank IT systems to allow rapid valuation. - Constraints in the interim: - Building adequate loss-absorbing buffers takes years. - The BRRD requirement for minimum requirement for own funds and eligible liabilities (MREL) supports an 8 percent rule: at least eight percent of total liabilities of the bank (including capital) are used for loss absorption before SRF or other public funding (e.g., European Stability Mechanism) could support a bail-in. - Decision not to transpose BRRD government stabilization tools in Ireland and the minimum eight percent rule could constrain handling of systemic cases. - Flexibility to use BRRD transfer powers may be constrained by strict interpretations on use of deposit insurance funds in resolution and uncertainty over departure from pari passu treatment of creditors outside bail-in. ### Funding in recovery and resolution - Funding concerns persist: - No euro area-wide deposit insurance scheme currently agreed. - No common, permanent fiscal backstop for the SRF currently agreed. - MREL: require adequate MREL issuance by Irish banks at appropriate levels within the company to make resolution plans more effective (see Main Recommendations timing: MT). - Deposit insurance and liquidity arrangements discussed in the broader note (detailed sections not reproduced here). ### Cross-border coordination - Under the BRRD, non-EU countries may be invited to participate in resolution colleges as observers but have no voting rights (e.g., concerning endorsement of a resolution plan for a subsidiary of a non-EU parent). - Irish authorities have a good track record of coordination with non-EU countries; lack of explicit BRRD requirements for strong coordination is not expected to impede such coordination going forward. ### National-level arrangements and systemic crisis management - The SRM and SSM have increased the number of stakeholders involved in decisions that may need to be taken quickly, potentially causing delays at the European level. - Recommended national-level actions to mitigate delays and enhance preparedness include: - Reconsider requirements for ex ante court approval of resolution measures or specify short timeframes (for example, 24 hours) for judicial action. - Commit publicly to seven-day payouts from the deposit guarantee scheme earlier than the DGSD 2024 deadline, and ideally by 2018. - Issue a terms of reference (TOR) for the Principals’ Group (a domestic coordination body) regarding its role in systemic crisis management. - Undertake simulation exercises in light of the complex new environment. - Roles of SRB and ECB in systemic crisis planning and management remain to be defined. ### Main Recommendations (from Table 1) - Orderly and Effective Resolution - Continue to identify and address impediments to resolvability. Timing: Ongoing - Remove requirements for ex ante court approval of resolution measures or specify a short timeframe (24 hours) for the court to make its determination. Timing: NT - Allow for accelerated SRM decision-making arrangements. Timing: MT - Clarify that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools. Timing: Immediate - Funding Recovery and Resolution - Commit publicly to seven day DGS payout, ideally by 2018. Timing: NT - Require adequate MREL to be issued by Irish banks, at the appropriate levels in the company, to make resolution plans more effective. Timing: MT - Establish permanent standing and joint public back-stop for the SRF. Timing: MT - Allow a more flexible use of DGS to fund resolution tools. Timing: NT - Implement an SRM-wide deposit insurance scheme. Timing: MT - Systemic Crisis Management - Issue TOR for the Principal’s Group with respect to its role in systemic crisis management. Timing: Immediate - Recommence simulation exercises. Timing: Immediate - Define the role of the SRB and ECB in planning for and managing systemic crises. Timing: NT Timing legend: Immediate: within 1 year; NT–near term: up to 2 years; MT–medium term: 2–5 years. ### Selected facts from the Irish crisis context (Box 1 and related text) - Banking sector size by 2008: 520 percent of GDP. - Government guarantee on September 30, 2008: €375 billion covering seven participating banks. - NAMA purchases: €74 billion in loans at a price-to-book value of 43 percent; funded by €30 billion of ECB eligible, government-guaranteed senior notes and €1.6 billion of unguaranteed subordinated notes. - PCAR findings: March 2010 identified €31.6 billion of additional capital needs; March 2011 bottom-up PCAR identified a further €24 billion capital shortfall. - ECB and Central Bank of Ireland liquidity support reached over €170 billion at year end 2010. - Capital injections related to guarantees: €80 billion of new capital injected into banks covered by the Irish guarantee; €64 billion provided by the Irish state and €15.5 billion from the private sector including subordinated debt holders. - Final net cost of the Irish government’s bank bailout recently estimated at €40 billion. *Source: IMF staff report, “Ireland — Executive Summary” (content unit: _cr16313 - EXECUTIVE SUMMARY).* ### 5. For Banking Union participants such as Ireland, prudential supervision falls under the ### _cr16313 - 5. For Banking Union participants such as Ireland, prudential supervision falls under the ### Prudential supervision under the SSM - The Single Supervisory Mechanism (SSM) assigns specific tasks to the ECB for prudential supervision of banks and reserves other tasks for the national competent authority (NCA). - Under the SSM the ECB directly supervises four banks in Ireland identified as “significant institutions” (SIs): AIB, PTSB, BOI, and Ulster Bank of Ireland (UBIL). - The four SIs account for roughly 58 percent of total domestic assets and 72 percent of total customer deposits. - Five subsidiaries of SIs based in other euro area countries operate in Ireland and, together with their parent banks, are subject to consolidated supervision by the ECB. - The remaining 13 banks in Ireland are identified as “less significant institutions” (LSIs) and are directly supervised by the Central Bank of Ireland as NCA, subject to the oversight of the ECB. - Both SIs and LSIs are supervised under a common legal framework deriving from the CRD IV/CRR, the BRRD, and EBA standards and guidelines. - Under the SSM Regulation the ECB may directly supervise an LSI where necessary to ensure consistent application of high supervisory standards, including in cases where financial assistance has been requested or received from the European Financial Stability Facility or the European Stability Mechanism (ESM). ### SSM operational arrangements and Joint Supervisory Teams (JSTs) - Decision-making is centralized within the ECB, but the SSM is operationally a joint exercise. - Joint Supervisory Teams (JSTs) undertake day-to-day supervision of SIs at their highest level of consolidation within the SSM. - JSTs are led by ECB coordinators, include a sub-coordinator and staff from the NCA, and utilize national staff and legislation. - The ECB may exercise (directly or indirectly by instruction to the Central Bank of Ireland) powers available under EU law, powers available to the Central Bank of Ireland as NCA under any Irish law that transposes a directive, and any other power available to the Central Bank of Ireland under Irish law. - Any exercise of power by the ECB against a private party, whether under EU or national legislation, requires approval of the ECB’s Governing Council. ### Recovery planning (scope, process, timelines, and findings) - All banks in the EU are subject to recovery planning requirements; most LSIs are under simplified obligations. - Recovery plans are prepared by banks and assessed by the competent supervisory authority (Central Bank of Ireland for Irish LSIs; ECB for Irish SIs) and shared with the relevant resolution authority. - For the four Irish SIs the JSTs, in cooperation with the Crisis Management Division of the ECB and the Crisis Management Unit of the Central Bank of Ireland, are responsible for assessing recovery plans and coordinating with supervisory colleges and the EBA. - Timeframes and deadlines: - Within six months from submission to the authorities, the JST must communicate directly to the bank any recommendations or changes needed to address deficiencies or impediments to implementation. - If deficiencies are material, the institution has two months, extendable by one month, to submit a revised plan addressing the material deficiencies. - Status and key issues: - All four Irish SIs have submitted full scope recovery plans and received feedback from their JST by end-March 2016. - Key issues and common themes include the need to calibrate more specific key indicators and recovery actions (e.g., divesting business lines) and to take steps now to make them implementable (including with respect to shared critical services). - Next recovery plan submissions are due by September or December 2016. - The Central Bank of Ireland reviews LSI plans (with support from its Crisis Management Unit as required) and must submit recovery plans of high priority LSIs to the Micro-Prudential Supervision Division of the ECB. - No Irish bank has received notice of a material deficiency since the recovery planning process commenced in Ireland. - The EBA has issued a detailed RTS on the content and assessment of recovery plans, meaning significant work remains for banks to conform to the new standard. ### Early intervention powers and constraints - Competent authorities have a broad array of early intervention powers, including directing a bank to change its business strategy or implement elements of its recovery plan where the institution no longer meets, or is likely to breach, prudential requirements set out in CRD IV or the CRR. - As thresholds are crossed, increasingly intrusive powers become available; where early measures are insufficient, the competent authority may remove or replace one or more members of senior management or the management body. - The competent authority may appoint a “temporary administrator” to carry out all or part of management functions when removal or replacement would be insufficient. - Risks and practical constraints of temporary administration: - A temporary administrator cannot override shareholders’ rights of approval for key corporate decisions such as recapitalization, mergers, or sale of assets. - Public appointment of a temporary administrator can create “signalling risk” that may trigger or exacerbate funding runs and thereby destabilize the balance sheet. - The Central Bank of Ireland has experienced challenges using a similar tool in the context of credit union resolution. - Resolution authorities have write-down and conversion powers for capital instruments: - A resolution authority may require write down of relevant capital instruments (common equity Tier 1, additional Tier 1, or Tier 2) independently of resolution when: (i) the competent authority has determined that unless the power is exercised the bank/group will no longer be viable; or (ii) extraordinary public financial support (other than support available to mitigate a systemic crisis as described elsewhere) is required by the bank or group. - The write down and conversion power may be used in combination with a resolution action where conditions for entry into resolution have been met. - Under Irish law implementation of write down/conversion requires the Central Bank of Ireland to seek prior court approval. - For an SI covered by the Single Resolution Mechanism, two levels of approval are required: an SRB decision and subsequent court approval of the Central Bank of Ireland’s implementation, with the court required to be satisfied that the decision is reasonable and not vitiated by error of law. ### Single Resolution Mechanism (SRM) — structure, status, and cooperation - The Single Resolution Mechanism (SRM) complements the SSM and covers bank resolution within the Banking Union. - Under the SRM Regulation a new agency, the Single Resolution Board (SRB), has direct responsibility for resolution planning and resolution decision-making for: - all SIs directly supervised by the ECB; - all cross-border banks established in the euro area (one bank in the case of Ireland); - any other LSI where resolution requires use of the Single Resolution Fund (SRF). - Implementation of SRB decisions is the responsibility of the national resolution authority (NRA); in Ireland the Central Bank of Ireland is the NRA. - The SRB assumed its responsibilities in January 2016 and is in the process of becoming fully operational: - The SRB is being built from the ground up (staffing, premises, operational capacity). - The SRB planned to hire approximately 110 staff during 2016, nearly doubling its staff complement from January 2016 when it commenced operations. - Cooperation arrangements: - The SRB and ECB concluded a Memorandum of Understanding (MoU) for mutual representation as observers, cooperation, and exchange of information in early intervention, recovery and resolution planning and resolution actions. - When a Crisis Management Group (CMG) is established for a globally systemically important bank, the SRB and ECB will coordinate tasks; the SRB chairs CMGs while the ECB chairs CMG topics related to recovery planning. - The SRB concluded a cooperation agreement with the European Commission (EC); the EC established a permanent task force to engage with the SRB. - The SRB’s 2016 work program includes: developing resolution plans for institutions under its remit, resolution planning and implementation manuals, defining funding and financing requirements for the SRF, and operationalizing MoUs with third countries. - The SRB has established Internal Resolution Teams led by SRB staff to coordinate country- or group-specific activities and has rehearsed decision procedures though not yet carried out a full simulation exercise with NRAs. ### National resolution capacity and planning in Ireland - Central Bank of Ireland resolution staffing and resources: - The resolution division currently has twelve staff split into two teams (resolution planning and policy; resolution execution and funds). - Another seven positions should be filled in 2016. - The Central Bank of Ireland has panels of private sector experts (e.g., lawyers and insolvency/restructuring practitioners) to call upon for implementation, and could consider designating supplemental staff from other divisions on a temporary basis for resolution implementation if necessary. - Resolution planning and resolvability: - Resolution planning has been led initially by the Central Bank of Ireland and is progressing. - In 2015 the Central Bank documented Preferred Resolution Strategies (PRS) and Resolvability Assessment Processes (RAP) for AIB, BOI, and PTSB, which now serve as transitional resolution plans. - Full resolution plans for each institution will be prepared during 2016 under the guidance of the SRB. - Most LSIs are subject to simplified resolution planning obligations, typically based on a PRS of liquidation. *IRELAND — INTERNATIONAL MONETARY FUND* ### 18. The Irish banking system continues to have cross-border significance, which enhances ### _cr16313 - 18. The Irish banking system continues to have cross-border significance, which enhances ### Cross-border significance and recent developments - The Irish SIs maintained important links to the UK throughout the crisis. - BOI and AIB have material subsidiaries in the UK. - AIB has 30 branches and 21 business centers in the UK. - For 2015, 44 percent of BOI’s loan portfolio was booked in the UK subsidiary. - UBIL is a significant subsidiary of the UK-based (and government-owned) RBS. - Citigroup has taken steps to consolidate its footprint in Europe under Citibank Europe plc, an Irish-licensed bank that operates through significant branches elsewhere in the EU. Citibank Europe PLC is currently identified as an LSI. - Recent legislative changes permit third-country banks to establish branches in Ireland. - Credit Suisse relocated its prime brokerage business from the UK to Ireland. - Dublin hosts foreign banks via its International Financial Services Centre; crisis experience highlighted risks, including: - German authorities’ bailout and wind-down of Depfa. - Significant funds (approximately €15 billion) the UK authorities injected to support UBIL. - Recapitalization required by ACCBank from its parent (Rabobank). ### Importance of cross-border coordination and resolution colleges - Reaching cross-border agreement on resolution plans and enhancing resolvability are crucial objectives. - The BRRD and SRM Regulation create a framework facilitating coordination between Banking Union participants and other EU member states (e.g., the UK). - Under the BRRD: - The group level resolution authority (GLRA) is responsible for creating a “resolution college” for any bank with presence in more than one member state. - The resolution college serves as a forum for joint discussion on setting MREL requirements, conducting the RAP and adopting resolution plans. - Membership includes representatives from the NRAs in jurisdictions where the bank has a significant branch or a subsidiary covered by consolidated supervision, competent ministries (the Department of Finance (DoF), in the case of Ireland), and deposit guarantee scheme (DGS) in those jurisdictions. - GLRA means the resolution authority in the member state where the consolidating supervisor is located (BRRD Article 2.44). - For Banking Union participants: - The SRB replaces the NRA as the GLRA; the NRA continues to participate in the resolution college as an observer (See SRM Regulation, Recital 91). - The EBA contributes by publishing guidelines and mediating disagreements but has no voting rights in resolution college decisions. - In practice, members take coordinated but independent action by written procedure following discussions in resolution colleges (EBA/RTS/2014/15; Final draft RTS on resolution colleges (EBA/RTS/2015/03)). ### Examples of resolution college use and recent processes - Resolution planning for Irish banks with significant UK links has benefited from BRRD coordination arrangements. - The BoE, as GLRA for RBS, hosted a resolution college in October 2015, identified the PRS, conducted the RAP and produced a draft resolution plan; the Central Bank of Ireland provided input and attended the RBS resolution college (along with a representative from the DoF). - With transfer of competency to the SRB, the next phase—reaching a joint decision on the resolution plan—will be undertaken by the SRB and BOE. - Similar actions were taken for BOI and AIB: prior to the SRB assuming functions, the Central Bank of Ireland was the GLRA for both banks and hosted resolution colleges, conducted the RAP and produced a draft resolution plan for AIB and BOI. - Under its new authority, the SRB will seek to reach a joint decision with the BOE on resolution plans for RBS/UBIL, BOI, and AIB during 2016. - The Central Bank participates in the resolution college for Barclays Bank plc, which has a subsidiary in Ireland identified as an LSI. - PTSB does not have significant operations or branches in other EU countries and consequently does not have a resolution college; a resolution stakeholder meeting was held for PTSB in December 2015. ### BRRD approach to third countries and European resolution colleges - The BRRD is less comprehensive on coordination between EU member states and third countries: - Within the EU, focus is on coordinated resolution planning and implementation via resolution colleges and the SRB. - With respect to third countries, the framework focuses on recognition of third country resolution measures and, where not possible, the ability to take unilateral action (for example against a local branch of a third-country bank). - The BRRD allows establishment of “European resolution colleges” to coordinate EU branches and subsidiaries of third-country banks; the purpose is to facilitate intra-EU coordination. - Resolution authorities from the relevant third country may be invited to participate in the European resolution college only at its own request and only as an observer. - In principle, members of a European resolution college could agree on the resolution plan for an EU subsidiary of a third-country bank without engaging the third-country resolution authority and irrespective of group-level strategies (e.g., CMG). - The BRRD does not require member states to consider implications of their resolution actions on third countries. - In practice: - As of the time of the report, no European resolution colleges had been established within the EU. - The Central Bank of Ireland is identifying members and establishing a European resolution college for Citibank Europe plc. - The BRRD allows NRAs to enter into memoranda of understanding with third countries; the Central Bank of Ireland is in the process of entering into such agreements with key authorities in the U.S. and Switzerland. - Continued coordination with third countries is encouraged to ensure local recovery and resolution planning is consistent with group-level plans. - Lack of clarity in the BRRD about which authority should lead establishment and organization of “European resolution colleges” contributes to this practical gap. ### Box 3 — Recognition of Third Country Resolution Measures (key points) - The Winding-Up Directive (Directive 2001/24/EC) provided for automatic, mutual recognition and enforcement of reorganization measures within the EU; BRRD-related amendments include resolution tools within “reorganization measures.” - BRRD Articles 94 and 95 established a framework for discretionary recognition and enforcement of third country resolution proceedings: - Decision to recognize should be taken jointly by members of the relevant European resolution college. - Where a joint decision is reached, national authorities must seek enforcement in accordance with national law; BRRD requires NRAs to have powers to do so. - In absence of a joint decision or a European resolution college, each NRA must decide whether to recognize and enforce a third country proceeding. - Where the SRB is the GLRA, it will make a recommendation to relevant NRAs; NRAs must comply or provide a reasoned explanation for non-compliance. - Grounds to refuse recognition or enforcement (limited circumstances): - (a) the third-country proceeding would have adverse effects on financial stability in that member state or another member state; - (b) independent resolution action in relation to an EU branch is necessary to achieve one or more resolution objectives; - (c) creditors, in particular depositors located or payable in a member state, would not receive the same treatment as third country creditors and depositors with similar legal rights under the third-country home resolution proceeding; - (d) recognition and enforcement would have material fiscal implications for a member state; - (e) effects would be contrary to national law. - The BRRD contemplates further cross-border recognition improvements, including Article 93 authorizing the EC to propose negotiations with third countries on cooperation agreements; European resolution college framework applies unless an international agreement on recognition enters into force. ### Entry into resolution — valuation - An independent valuation of the failing bank’s assets and liabilities must be completed prior to entry into resolution by the Central Bank of Ireland or the SRB as appropriate. - The valuation informs: - whether conditions for entry into resolution have been met; - selection of appropriate resolution tool(s); - amount of common equity Tier 1 capital to be created via write-down or conversion of relevant capital instruments; - amount of additional losses to be recognized and imposed on creditors. - Legislation allows a provisional, expedited process permitting the resolution authority to conduct its own valuation if required, but even this may be time consuming. - The Central Bank of Ireland identified timely valuation as a potential impediment to resolution: - Time required to complete valuation could present a significant challenge in a sudden failure of a large and complex bank. - Irish banks will need to develop capability to produce granular (loan level) information needed to enable valuation at short notice. - Authorities are encouraged to take forward plans in this area. ### Entry into resolution — decision-making process and timelines - For banks under SRB authority, triggering resolution entails a complex and potentially lengthy process (Annex II): - The ECB is primarily responsible for determining whether an entity is failing or likely to fail, the first condition for triggering resolution (Article 18(4) of the SRM Regulation). - The SRB determines the second and third conditions: whether no reasonable prospect that alternative private sector measures or supervisory action would prevent failure, and that resolution action is necessary and in the public interest. - The SRB prepares a resolution scheme (identifying resolution tools including, if applicable, use of the SRF), which must be validated by the EC in the following 24 hours. - The EC may, on an exceptions basis, in the first 12 hours involve the European Council for decisions regarding the use of the SRF or if it wishes to challenge the public interest determination. - The resolution scheme enters into force 24 hours from transmission by the SRB of the scheme if no objection has been expressed by the Council or by the EC. - The resolution scheme cannot be implemented by NRAs until the EC has adopted a positive or conditional decision on compatibility with the internal market and the State aid regulation. - For an LSI, the Central Bank of Ireland is responsible for determining whether the three conditions for entry into resolution have been satisfied (Regulation 62 of the IRL BRRD Regulations). ### Role of the courts and judicial review - Once European-level entry into resolution is approved, resolution action by the Central Bank of Ireland is subject to review by the Irish High Court: - The Central Bank must prepare a proposed resolution order (PRO) and, on an ex parte basis, apply to the court for prior approval (Regulation 104 and 105 of the IRL BRRD Regulations). - If the court is satisfied the PRO is reasonable and not vitiated by error of law, it must make a resolution order matching the terms of the PRO. - Within 48 hours of the making of the order, the bank subject to resolution, or an affected shareholder or creditor may apply to the court for the order to be set aside. - To uphold the order, the court must be satisfied the PRO was reasonable and not vitiated by an error of law. - Where the court sets aside the order, remedies would be limited to monetary damages if invalidation would prejudice interests of third parties (for example purchasers of assets disposed of through sale of business tool). - After the initial 48-hour window expires, limited options are available to challenge a resolution action and these options are generally not available to the bank subject to resolution or an affected shareholder or creditor (Regulation 148 of the IRL BRRD Regulations). - Under Regulation 110 of the IRL BRRD Regulations, there is a rebuttable presumption against granting a stay or injunction on implementation of a resolution order while a decision to set aside is pending; a stay or injunction may be granted only where (i) the application was made on notice to the Central Bank of Ireland and heard inter-parties and (ii) the substantive action is likely to succeed. - For eligible persons, an application for judicial review generally must be submitted within 10 days of being notified or becoming aware of the resolution order; the same standard of review and limitations on remedies applicable to petitions to set aside resolution order apply. - European-level decisions may be subject to review by the European Court of Justice (ECJ): - SRB decisions relating to commencement of resolution, application of a resolution tool, or exercise of a resolution power are subject to ex post judicial review by the ECJ (Article 86 of the SRM Regulation). - The ECJ reviews legality (not substance) of the decision but may declare SRB decisions void, order suspension of implementation, or reverse resolution action—potentially affecting national-level actions. - If an SRB decision/instruction to the Central Bank of Ireland or another NRA were declared void, there would be no legal authority for the NRA to act (unless ECJ decision provides otherwise), regardless of national court decisions. ### Timeliness, legal certainty, and Key Attributes considerations - Under the Key Attributes, court roles should not impede timeliness or legal certainty of orderly resolution actions. - The resolution authority must have capacity to exercise resolution powers with speed and legal certainty necessary to avoid disorderly bank failures. - While constitutional legal remedies and due process apply, the legal framework should not provide for judicial actions that could constrain implementation of, or result in reversal of, measures taken by a resolution authority acting within its legal powers and in good faith. - Where court approval is required prior to exercising resolution powers, such approval should not impede timely intervention and the ability to achieve an orderly resolution. *International Monetary Fund — content as provided in the supplied PDF excerpt* ### 29. In the Irish context, both the speed and legal certainty of resolution actions are of ### 29. In the Irish context, both the speed and legal certainty of resolution actions are of ### Concerns about speed and legal certainty - The Irish requirement for prior court approval for resolution action should be reconsidered or a time limit imposed. - Prior court approval provisions derive from the 2011 Act and have been applied in several credit union resolutions (Annex III). - Those provisions were designed for (small) credit unions; the same balance may not be appropriate for large banks subject to the BRRD Regulations. - Credit union sector size: holds just 3 percent of total credit institutions’ assets. - Risks noted: - Uncertainty whether credit union experience “reads across” to complex, systemic cases. - In cases of a significant institution (SI) or cross-border bank, the Central Bank of Ireland would act on instruction of the SRB and the EC under supranational law; the Irish constitution recognizes the primacy of supranational law. - Multiple stakeholders in SRM decision-making already risk delayed intervention; additional national-level delays could undermine effective resolution. - Legal uncertainties at the European level from ECJ processes should be addressed. ### Procedural entry into resolution and the resolution period - Once procedural hurdles for entry into resolution are satisfied, the Central Bank of Ireland must implement resolution within the SRB resolution scheme and the court’s resolution order. - The Central Bank of Ireland may act directly as resolution authority or, if the court order so provides, through a special manager. - Once a resolution order is made, the “resolution period” commences (Regulation 106 of the IRL BRRD Regulations). - During the resolution period the Central Bank of Ireland may oversee implementation and exercise control without further court approval by: - issuing directions; - exercising supervisory powers under financial services legislation; - overseeing the special manager’s performance of functions; - exercising certain other enumerated powers in IRL BRRD Regulations (Regulation 114). - The resolution period terminates on: - (i) the setting aside of the resolution order; - (ii) the making of an order for the liquidation of the institution under resolution; - (iii) when the Central Bank of Ireland orders it. ### SRM and BRRD regime — available tools and framework alignment - The SRB resolution scheme and the High Court’s order may provide for use of one or more resolution tools, supporting powers and partial liquidation. - BRRD introduced four principal resolution tools: - sale of business tool; - bridge institution tool; - asset separation tool; - bail-in tool. - BRRD also introduced optional government financial stabilization tools and supporting powers (e.g., appoint special manager, impose stays on rights to terminate contracts or execute collateral). - BRRD contemplates national insolvency regimes remain applicable as an alternative to resolution and requires resolution authorities to have ability to preempt insolvency proceedings (Article 86 of the BRRD). - Broad assessment: BRRD framework broadly consistent with the Key Attributes. ### Bail-in tool, write-down/convert powers, and limits on exclusions - BRRD includes power to write down or convert capital instruments (available during early intervention and in resolution) and a bail-in tool (BRRD Articles 43–44; SRM Regulation Article 27; IRL BRRD Regulations, Regulation 79–80). - Central Bank of Ireland may write down and/or convert into equity the liabilities of the bank. - Relevance: - Especially relevant for systemic banks in an SPE resolution strategy (to recapitalize and continue the bank). - Can support other tools (e.g., convert/write down claims or debt instruments transferred to a bridge institution under multiple point of entry). - Flexibility to exclude liabilities from bail-in is constrained: - BRRD allows limited departures from strict pari passu for operational reasons or to prevent contagion. - BRRD prescribes the “No Creditor Worse Off” (NCWO) principle: no creditor should be worse off than in insolvency at the time of the decision to commence resolution. - If NCWO is breached, compensation should be paid from the single resolution fund (SRF). - SRF can only be used to cover costs resulting from not bailing-in some creditors if shareholders and creditors have collectively first absorbed losses of at least eight percent of total liabilities. - This eight percent requirement could reduce flexibility to deal with systemic cases until adequate loss absorbency is in place. ### Sale of business and bridge institution tools - Sale of business tool: Central Bank of Ireland may sell shares of failing bank, or its assets, rights and liabilities to a private sector purchaser (BRRD Articles 38–39; SRM Regulation Article 24; IRL BRRD Regulations, Regulations 69–70). - Consent of shareholders or third parties is not required to execute transfer. - Bridge institution tool: Central Bank of Ireland may transfer shares or some assets (with liabilities ≤ value of assets transferred) to a special purpose temporary bridge institution (BRRD Articles 40–41; SRM Regulation Article 25; IRL BRRD Regulations, Regulations 71–73). - Bridge institution established under the Companies Act 2014; wholly or partially owned by public authorities; authorized to conduct banking pending sale or wind-down. ### Pari passu treatment concerns for other resolution powers - Neither EU nor Irish legislation explicitly allow departures from pari passu for other resolution powers (sale of business, bridge institution). - Key Attributes recommend flexibility to depart from equal treatment of creditors of the same class where necessary to contain systemic impact or maximize value. - Lack of express authority may give rise to legal challenges under the Irish Constitution or ECHR. - Changes would need to be made at the European level; otherwise transfers departing from pari passu risk not receiving automatic recognition and enforcement by other member states under the Winding-Up Directive. - Historical note: automatic recognition under the Winding-Up Directive worked well during Irish banking crisis (example: subordinated liabilities order for AIB), but two more recent cases refused recognition where NRA actions did not precisely match BRRD terms (Goldman Sachs International v Novo Banco and Bayerische Landesbank v Heta Asset Resolution). ### Asset separation tool - BRRD Article 42; SRM Regulation Article 26; IRL BRRD Regulations, Regulation 74. - Central Bank of Ireland may transfer assets, rights and liabilities to a separate asset management vehicle under authority ownership/direction. - Objective: realize greater value from assets by selling or winding them down. - Asset separation may only be used in combination with other resolution tools to minimize State aid implications. ### Government stabilization tools (not transposed by Ireland) - BRRD provides two optional government stabilization tools (BRRD Articles 56–58): - public equity support tool: temporary capital in exchange for CET1, additional Tier 1, or Tier 2 instruments; - temporary public ownership tool: temporary acquisition of shares of bank subject to resolution. - Use of either tool is subject to State aid rules and the mandatory eight percent total liabilities contribution by shareholders and creditors. - Irish authorities have elected not to transpose these optional tools. - Implication: absence of these tools increases reliance on resolution planning and improving resolvability, including ensuring adequate loss absorbency in Irish banks. ### National insolvency law and liquidation powers - Part 7 of the Central Bank and Credit Institutions (Resolution) Act 2011 covers liquidation of “designated credit institutions” and residual entities after resolution tools applied. - When liquidation is applied directly, Central Bank of Ireland has strong oversight powers: - Central Bank of Ireland has exclusive competence to permit winding-up of a bank. - No petition may proceed without Central Bank of Ireland providing a no objection in writing. - Only a liquidator approved by the Central Bank of Ireland may be appointed. - Liquidator statutory objectives: - primary objective: (i) facilitate the Central Bank of Ireland in ensuring each eligible depositor receives the prescribed amount payable under the DGS, or (ii) facilitate transfer of that amount from the DGS to another bank to hold on behalf of each eligible depositor; - second objective: wind up the affairs of the bank to achieve best results for the bank’s creditors as a whole. - Liquidator must cooperate with the Central Bank of Ireland. ### Credit union resolution experience (practical evidence) - Central Bank of Ireland applied resolution powers (with BRRD equivalents) in four credit union resolutions since 2011, providing practical experience for small deposit takers. - Credit union characteristics: relatively simple institutions, mostly consumer loans and investments as assets, funding via member deposits. - Box 4 case figures (preserve amounts exactly as in source): - Newbridge Credit Union (NCU): total assets €58 million; total liabilities €75 million; 31,000 members/depositors. CIRF funding of approximately €26 million (to date). - Howth Sutton Credit Union Limited (HSCU): total assets €5.1m; total liabilities €6.7m; 3,000 members/depositors. Upfront CIRF payment €2 million; transfer March 2014. - Berehaven Credit Union (BCU): total assets €11.3 million; total liabilities €11.4 million; 3,600 members/depositors. DGS pay-out compensated depositors for a total value of € 11m; majority of payments made within 7 days. - Killorglin Credit Union Limited (KCU): total assets €30.5 million; total liabilities €30.2 million; 9,000 members/depositors. CIRF injection €2 million; transfer December 2014. - Conclusion: available powers and procedures adequate for these smaller institutions; methods used minimized disruption and enabled speedy resolution. ### Resolution funding and MREL - To ensure resolvability, authorities will need to require sufficiently high quality MREL at appropriate levels in the company. - All banks in the EU will be required to have adequate liabilities deemed eligible to absorb losses in a resolution. - MREL will be set on a case-by-case basis from January 2016, with an associated transition period to be defined by the resolution authority. *Source: IMF staff report excerpt on Ireland (sections 29–40).* ### 41. An EBA draft RTS outlines the criteria that resolution authorities should apply when ### An EBA draft RTS outlines the criteria that resolution authorities should apply when setting MREL ### EBA draft RTS and MREL criteria - The draft RTS outlines two elements of MREL: (i) loss absorption and (ii) recapitalization. - Under the draft RTS, loss absorption is derived in the first instance from the bank’s minimum capital requirements (including pillar 2 and the combined buffer). - Recapitalization amounts may only be necessary for institutions for which liquidation under normal insolvency processes is determined not to be feasible. - NRAs may take account of specific bank features (business model, risk profile, governance, etc.) using the outcome of the supervisory review and evaluation process and adjust the loss absorption or recapitalization amount accordingly. - The NRA may discount the counter cyclical buffer, which depends upon the credit cycle, as it may be at zero at the point when resolution occurs (e.g., during a downturn). - The NRA has ultimate discretion but must explain to the supervisor when it departs from the prudential requirement in setting MREL. - For determining the recapitalization amount, the NRA would take into account the PRS. - The combined buffer includes the capital conservation, countercyclical, systemic (either G-SIB or D-SIB and the systemic risk buffer). ### Harmonization, liability hierarchies, and national approaches - Ideally a more harmonized approach would be taken to determining the eligibility of liabilities for MREL across member states. - The EBA’s draft RTS was amended by the EC and affords scope for different approaches to positioning MREL in national creditor hierarchies. - Different approaches reflect differences in bank group and liability structures across member states. - Example: In the UK, holding structures are more common and debt issued by a holding company above the operating bank will be used to satisfy MREL (and TLAC) requirements; that may provide a cleaner operational and legal separation between bail-in-able holding company debt and other creditors and depositors of the bank. - Building up eligible MREL buffers and restructuring banking groups to issue debt and equity from a holding company would take time. - The Irish authorities consider that the SRM Regulation does not afford the SRB with the powers needed to set MREL at the holding company level, as would be needed to make structural subordination effective; such powers should be confirmed. - Significant divergences create challenges for resolution planning for banks operating in multiple EU jurisdictions and create pricing, risk management, and possible arbitrage risks for investors. ### Single Resolution Fund (SRF): purpose and structure - The SRF will be paid for by contributions from Irish and other euro area banks. - The SRM Regulation establishes the SRF, which is owned and administered by the SRB. - Since all euro area banks are eligible for funding from the SRF, it replaces the national resolution funds mandated by the BRRD with respect to these banks. - The SRF may be used only to the extent necessary to ensure the effective application of the resolution tools, namely: - To guarantee the assets or the liabilities of the institution under resolution; - To make loans or to purchase assets to the institution under resolution; - To make contributions to a bridge institution and an asset management vehicle; - To pay compensation to shareholders or creditors who suffered greater losses than they would have if the bank had been wound up under the applicable insolvency regime(s); - To make contributions to the institution under resolution in lieu of the write-down or conversion of liabilities of certain creditors under exceptional circumstances (see paragraphs 33 and 48). - The goal is to reach at least one percent of covered deposits in the Banking Union (approximately €55 billion) by end-2023. - During the build-up period to 2023, any funding collected by a national resolution fund prior to the establishment of the SRF, and any additional funding collected by an NRA from banks within its jurisdiction from the time of establishment of the SRF until the end of 2023, are accumulated in national compartments within the SRF. - Funds in national compartments, which are not yet mutualized, may only be used to resolve banks within that jurisdiction. - National compartments will be progressively mutualized (starting with 40 percent in 2016) and the mutualized compartment may then be used in a second step when national compartments are exhausted. - At the end of the build-up period, national compartments will be fully mutualized and cease to exist. - The legal architecture underpinning payment of national contributions into the SRF includes an Intergovernmental Agreement (IGA) on the Transfer and Mutualisation of Contributions to the SRF, which Ireland ratified through the Finance (Miscellaneous Provisions) Act 2015. - SRM participants agreed to provide transitional credit lines to the SRB to back only their national compartment in the SRF in case of possible funding shortfalls, until sufficient contributions accrue to the SRF. - The SRB will enter into harmonized Loan Facility Agreements (LFAs) with member states agreeing transitional credit lines of up to the estimated target level of €55 billion. - The funding made available under the LFAs will be used as a last resort to be repaid by contributions from the banking sector in the SRM country where the resolution took place. - Individual credit lines will only be available as a last resort, after exhaust­ing all other financing sources, including the 8 percent bail-in requirements as well as the SRB's external borrowing capacity. - The Irish LFA is currently being negotiated. - Member states plan to negotiate arrangements for a common backstop to the SRF, to be fully operational at the latest by the end of the transitional period, when the SRF is fully mutualized; such a backstop could take the form of a credit line from the ESM (or from member states collectively), which could be drawn upon in a systemic crisis. Any borrowings would be reimbursed from ex post levies on credit institutions. ### Constraints on SRF funding and the eight percent bail-in requirement - Although the BRRD allows for departures from the principle of equal treatment of creditors in the context of bail-in, the SRF can only be used to cover the costs resulting from not bailing-in some creditors if: - (i) the shareholders and creditors have collectively first absorbed losses and recapitalizations of at least eight percent of total liabilities, including own funds, after a fair, prudent and realistic valuation; and - (ii) the amount provided by the SRF is limited to the lesser of five percent of the bank’s total liabilities or the means available to the SRF plus any amounts that could be raised through ex post contributions in the following three years. - Approval from the EC under the state aid rules is also required. - The EC must apply the eight percent rule when the SRF is used for any resolution purpose (e.g., bridge banks). - The eight percent bail-in requirement may create transition risks, in Ireland and elsewhere in the EU: - The amounts and location of MREL needed to support the PRS of SPE bail-in for SIs across the euro area may not yet be in place. - Introducing the eight percent requirement in 2016 may create transition risks given that adequate loss absorbing capacity may not yet be in place. - The eight percent requirement might also have permanent risks in a systemic crisis. - The EBA draft RTS contemplates that the MREL recapitalization amount for banks with liquidation as the PRS may be zero. If liquidating small banks were not possible due to wider contagion risk, the use of resolution tools and resolution funding may be needed; however, these banks would not have previously been required to issue sufficient MREL to support resolution and satisfy any BRRD or state aid requirement for resolution funding. ### Box 5: Simplified example of bail-in with inadequate MREL (key figures) - Liquidation scenario: - Losses in liquidation assumed to be €30 billion and borne by creditors in accordance with the creditor hierarchy established in the BRRD. - DGS incurs a cost of €3 billion to compensate for losses that would otherwise be borne by covered depositors. - Bail-in scenario: - Losses in resolution assumed to be €15 billion, which must be written down to recapitalize the bank. - Authorities determine they can only bail-in capital instruments, subordinated creditors and bond holders (even though they rank pari passu) without risking contagion and financial instability. - SRF funding cannot be used because eight percent of losses would not have first been borne by creditors (i.e., there is inadequate MREL). - The DGS cannot provide the €8 billion needed, as this would exceed what the DGS would have paid in liquidation. - If MREL of €4 billion or more had been issued in advance, and structurally or statutorily subordinated, the SRF could have been used and the bail-in effected while still protecting systemic creditors and with low risk of legal action by subordinated MREL investors. - Pay-offs under the two scenarios (summary table values preserved in source): - Total liquidation losses: €30 billion. - Total bail-in losses: €15 billion. - DGS contribution: liquidation €3 billion; bail-in €8 billion (note: scenario explains DGS cannot provide €8 billion in the bail-in case given constraints). - SRF contribution: liquidation 0; bail-in 0. ### European Stability Mechanism (ESM) recapitalization powers - The ESM can directly recapitalize banks under strict conditions. - The ESM has a lending cap of €500 billion, paid-in shares of €80 billion and €620 billion of callable shares and can finance itself from the market and member countries. - ESM assistance will only be granted when the recipient member state proves that it lacks other options for recapitalizing a bank that threatens the financial stability of the euro area or its member states. - A direct recapitalization instrument was adopted in December 2014, up to a maximum of €60 billion. - Conditions on using the tool: it can only be used to fund bank recapitalizations or resolutions when the eight percent rule is met, the SRF five percent contribution has been disbursed, and all unsecured non preferred liabilities (other than eligible deposits) have been written down or converted in full. - Prior to December 2014, the ESM could only indirectly recapitalize banks by providing loans to a member state to on-lend to its undercapitalized bank(s); Article 1(2) Indirect Recapitalization Guideline was used to disburse €41 billion to the Spanish banking sector. ### Deposit insurance and DGS constraints - The DGSD harmonized coverage across the EU, transposed into Irish legislation in November 2015, extending deposit coverage (e.g., to deposits of large nonfinancial companies), introducing transition periods for faster pay-out, and ex ante funding arrangements, while maintaining protection of deposits at €100,000. - The DGSD requires that by July 3, 2024, each DGS shall reach an ex ante target level of at least 0.8 percent of the amount of covered deposits of its Members. - As of March 31, 2016, the scheme covered 374 credit institutions and €89 billion of covered deposits. - DGS protection includes deposits held at branches of authorized Irish institutions operating in other EU member states. - Strict interpretation of the least cost criteria (Article 109 of the BRRD) may constrain the DGS’s ability to fund resolutions: - Article 109 states that “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.” - This can be interpreted to mean the DGS may not provide gross, upfront support greater than its estimated cost (net of recoveries in liquidation) without taking recoveries from resolution into account. - Under this strict interpretation, and given the super preference given to covered deposits in the BRRD, the ability of the DGS to support resolution powers (e.g., by injecting cash to back a deposit transfer) may be highly constrained. - It should be reconsidered to allow the DGS to disburse greater funds upfront in a resolution if the estimated final cost to the DGS, net of recoveries, would be lower than its estimated net liquidation costs. - Without such flexibility the transfer powers may not work, especially in fast failure when due diligence is curtailed, or during a crisis when banking assets may not easily be sold and cash needs to be injected instead to back deposits. ### Box 6: Irish Deposit Insurance and Resolution Funds (key points) - DGS: - Until 2016, member credit institutions (30 banks and 345 credit unions as of March 31, 2016) had to maintain Deposit Protection Accounts equivalent to 0.2 percent of total deposits; these were not paid in. - As required by the DGS Directive, this mechanism will be replaced with an ex-ante paid-in fund in 2016, to reach 0.8 percent of covered deposits by 2024. - Levies will be calculated on a risk adjusted basis by the Central Bank of Ireland, which manages the fund. - For the next two years, an interim scheme in Ireland will ensure no break in cover. Deposit Protection Account balances will be transferred to a Legacy Fund to be used in the first instance to meet contributions to the new ex ante fund. - Credit Institutions Resolution Fund (CIRF): - Following the creation of the BIFR Fund in 2015, the only firms in-scope of the resolution tools in the CBCIR, and which are required to pay into and able to benefit from the CIRF, are credit unions (banks were previously covered). - The Central Bank of Ireland manages the CIRF, whose purpose is to provide a source of funding for the resolution of financial instability in, or an imminent serious threat to the financial stability of a credit union. - On December 23, 2011, the Minister advanced €250 million to the CIRF, which has not yet been reimbursed. - Two other funds have been levied on credit unions since 2014/2015 to address risks in the sector and fund restructuring and stabilization costs. In respect of restructuring a €250 million advance was provided by the Minister, most of which remains unused and is expected to be repaid. - Bank and Investment Firm Resolution (BIFR) Fund: - Established under the IRL BRRD Regulations, with a target level to be raised over 10 years (from risk based premia) of 1 percent of covered deposits. - Since the creation of the SRF the only institutions covered by the BIFR are investment firms (those in scope of the CRR and with €730,000 or more capital). - Accordingly, annual levies will decline from about €75 million to less than €1 million. - SRF: - From January 1, 2016 onwards, institutions which are in-scope of the SRM Regulation are covered by the SRF instead of the BIFR Fund. - In accordance with Article 3 of the IGA, all monies contributed by institutions in-scope of the SRM (all banks) were transferred from the BIFR to the SRF in January 2016. - Any payment from the SRF would be triggered by the SRB as part of a resolution scheme it adopted under Article 18(6) of the SRM Regulation. *Source: IMF staff report excerpt on Ireland, including discussion of EBA draft RTS on MREL, SRF, ESM, DGSD, and Irish resolution and deposit insurance arrangements.* ### 53. Discussions are ongoing on the missing pillar of the banking union—a common euro ### _cr16313 - 53. Discussions are ongoing on the missing pillar of the banking union—a common euro ### European Deposit Insurance Scheme (EDIS) discussions - The EC announced in 2015 a proposal to implement a European Deposit Insurance Scheme for Banking Union members by 2024.66 - Under the proposal national DGS would be gradually mutualized over time and in three stages: - Stage 1 (reinsurance): the scheme would provide support (financed by contributions from the national DGS) to a national DGS that has first exhausted its national fund. - After three years, move to a co-insurance scheme in which the contribution to the scheme would progressively increase over time. - Full mutualization to be reached in 2024. - Some members have expressed strong reservations citing: - lack of a level playing field, - national differences in insolvency regimes, - banks’ exposure to domestic sovereigns, - potential for higher losses in some countries being transmitted across the membership. - Footnote reference: 66 See http://ec.europa.eu/finance/general-policy/banking-union/european-deposit-insurance-scheme/index_en.htm ### Deposit Guarantee Scheme (DGS) payout timing and operational readiness - Current statutory DGS payout obligation: issue compensation to depositors duly verified as eligible within 20 working days of a credit institution failing. - DGSD timeline: to be reduced to 7 days by 2024. - Recommendation: public commitment to achieving most payouts within seven days should be made at a much earlier juncture (ideally by 2018). - Operational arrangements in place: - DGS managed by a specialized team within the Central Bank’s Payment and Securities Settlements Division. - Banks required to provide a Single Customer View for each eligible depositor and complete depositor data files within 72 hours of a request. - DGS can instruct a liquidator to assist in verification of depositors or engage services to assist in administration of guarantee payments. - Rationale: earlier seven-day payout commitment recommended to enhance depositor confidence and reduce possible economic disruption associated with non-availability of liquidity. ### Liquidity provision — legal basis, ELA, and ECB role - National legal basis: Central Bank Act 1942 provides the statutory basis for the Central Bank of Ireland to provide emergency liquidity assistance.67 - ELA characteristics under Euro system rules: - Can only be provided to solvent institutions, typically on a short-term basis, against sufficient collateral and at a penalty rate. - No formal obligation for a recipient to be deemed systemic, but systemic effects are weighed by the Governor in conjunction with the Central Bank of Ireland’s Financial Stability Committee when determining ELA. - Government indemnity arrangements used in the crisis remain in place until 2018.68 Continuation beyond that date will be considered in the context of the BRRD powers and reforms to enhance resolvability. - ECB role and NCB loss-sharing differences: - Unlike normal monetary policy operations where the 19 NCBs share losses in proportion to economies and populations, ELA is provided by the Central Bank of Ireland, which bears any risk. - For overall ELA volume exceeding €2 billion, the Governing Council (with a majority of two-thirds of the votes cast) will consider whether the ELA may interfere with the objectives and tasks of the Euro system.70 - The risk of losses from ELA provided during the crisis peaked at around €80 billion and in the case of Anglo Irish Bank/ IBRC extended to four years, contributing to the bank-sovereign nexus in the Irish crisis.71 - Sterling liquidity: - Liquidity in pound Sterling is significant for some Irish banks; a swap agreement between the ECB and the BoE, which could be used by the ECB to on-lend sterling liquidity to the Central Bank of Ireland, has been made permanent.72 ### Transparency and ELA disclosure considerations - The Central Bank of Ireland publishes a monthly balance sheet with a month’s delay. - Issue: a disbursal of significant ELA could be inferred from these balance sheets and its amount roughly estimated.73 - Recommendation: financial stability considerations may justify more flexibility in both the content and timing of the disclosure of information relating to ELA provision.74 - Constraint: Central Bank of Ireland’s freedom may be limited by Euro system arrangements and rules (ECB Guideline (ECB/2010/20) and related considerations).75 - Suggestion: reconsider transparency policy when the ELA arrangements within the euro system are next reviewed. ### Funding in resolution and SRB planning - The SRB is drafting a resolution planning manual that will address funding in resolution (manual has not been shared with assessors). - Resolution planning needs to specify specific liquidity and collateral management strategies to ensure the preferred resolution strategy will work. - Note: bailed-in entities will likely need significant liquidity immediately after resolution, including potentially access to ELA. - In accordance with the BRRD, resolution plans cannot assume ELA will be made available (its provision remains at the discretion of the central bank); therefore provision for other sources of liquidity should be made. ### Systemic crisis management — institutions, exercises, and clarifications of roles - Established standing arrangements: - Principals’ Group: interagency coordinating committee comprised of senior officials from DoF (Secretary-General and Second Secretary), Central Bank of Ireland (Governor and two Deputy-Governors), National Treasury Management Agency (CEO and Director of Funding), with other officials attending as required. - No legislative mandate or specific terms of reference currently; one reportedly being prepared. - Working groups established under the Principals’ Group for contingency planning (including exiting the ELG scheme and banking crises in southern Europe). - Crisis simulation exercises: - No crisis simulation exercises undertaken since 2007 (domestic exercises took place in 2005 and 2007). - Recommendation: authorities should undertake a simulation exercise reflecting the complex new environment and conjectural near-term developments. - Central Bank of Ireland may participate (if invited by the SRB) in three crisis simulation exercises planned by the SRB for 2017, including on cross-border failures within and outside the euro area. - Roles and responsibilities: - Recommendation: issue and publish terms of reference for the Principals’ Group to clarify roles and enhance transparency. - At the European level, consider defining the role of the SRB and ECB in preparedness and management of a systemic banking crisis, including potential simultaneous failure of multiple banks in a member state or states. ### Annex I — Early intervention powers (thresholds and available measures) - Early intervention purpose: Central Bank of Ireland and/or the ECB may take increasingly intrusive measures as thresholds are crossed. - Threshold 1: Where a credit institution does not meet (or is likely to breach within the subsequent 12 months) prudential requirements set forth in the CRD IV (or IRL CRD IV Regulations) or the CRR, or competent authority determines processes/own funds/liquidity do not ensure sound management and coverage of risks. - Powers available under IRL CRD IV Regulations (Regulation 92) and SSM Regulation (Article 16(2)): - a. require institutions to hold additional own funds; - b. require reinforcement of arrangements, processes, mechanisms and strategies regarding the ICAAP, governance, recovery and resolution plans; - c. require institutions to present a plan to restore compliance with supervisory requirements and set a deadline for implementation; - d. require institutions to apply a specific provisioning policy or treatment of assets in terms of own funds requirements; - e. restrict or limit the business, operations or network of institutions, or request divestment of activities that pose excessive risks; - f. require reduction of risk inherent in activities, products and systems; - g. require institutions to limit variable remuneration as a percentage of net revenues where inconsistent with maintaining a sound capital base; - h. require institutions to use net profits to strengthen own funds; - i. restrict or prohibit distributions or interest payments to shareholders, members or holders of Additional Tier 1 instruments, where prohibition does not constitute an event of default; - j. impose additional or more frequent reporting requirements, including on capital and liquidity positions; - k. impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities; - l. require additional disclosures; - m. remove at any time, members from the management body of a credit institution who do not fulfill specific requirements (Available only to the ECB under the SSM Regulation). - Powers available under IRL BRRD Regulations (Regulation 39): - a. direct the institution or its management body to implement one or more arrangements or measures set out in the recovery plan; - b. direct the institution or its management body to update the recovery plan and implement measures within a specific timeframe; - c. direct the institution or its management body to assess its situation, identify measures and draw up an action program and timetable; - d. direct the institution or its management body to convene a meeting of shareholders; - e. directly convene a meeting of shareholders where the institution fails to comply with a direction under (d); - f. set the agenda for a shareholders meeting and require certain decisions to be considered for adoption; - g. exercise any of the Bank’s powers under the 2010 Act (in accordance with allocation of powers contained in the 2010 Act); - h. direct the institution or its management body to draw up a plan for negotiation on restructuring of debt with one or more creditors; - i. direct the institution to make changes to its business strategy; - j. direct the institution to make changes to its legal or operational structures; - k. acquire, including through on-site inspections, any information necessary to update the resolution plan and prepare for possible resolution and valuation, and provide such information to the resolution authority. - Threshold 2 (IRL BRRD Regulations (Regulation 40–45)): - Triggered where (A) (i) significant deterioration in financial position; or (ii) serious infringements by the institution or its management body of national law or constitution; or (iii) serious administrative irregularities; and (B) early intervention measures under Regulation 39 would not be sufficient to reverse deterioration or remedy infringements/irregularities. - Competent authority may remove some or all of senior management or management body. - Threshold 3 (IRL BRRD Regulations (Regulation 46–60)): - Triggered where competent authority considers (a) conditions for removal under Regulation 40(1) are met, (b) removal would be insufficient to remedy situation, and (c) a temporary administration order is necessary. - Competent authority may make a proposed temporary administration order. ### Annex II — Triggering resolution in Ireland (SRB jurisdiction) - Conditions and sequence to trigger resolution under SRB jurisdiction: - The ECB, after consultation with the SRB, determines that the bank is failing or likely to fail, and informs the EC and the SRB. The SRB may make that determination if the ECB fails to act within 3 days’ notice by the SRB of its intention to make such determination. - The SRB, in close cooperation with the ECB, determines that, given timing and other circumstances, there is no reasonable prospect that private sector measures or early intervention measures would prevent the failure. The ECB may also inform the SRB that this second condition is met. - The SRB adopts a resolution scheme once it determines resolution action is necessary and in the public interest, and immediately after adoption transmits it to the EC. - Within 24 hours after transmission, the EC either endorses the resolution scheme, or objects to it, with regard to discretionary aspects of the resolution scheme in cases not covered by European Council decisions. - Within 12 hours after transmission, the EC may propose to the Council to object (within 12 hours) to the resolution scheme on the ground that it does not fulfill the public interest criterion necessary for resolution. Alternatively, the EC can propose that the Council approves or objects (within 12 hours) to a material modification of the amount of SRF monies provided for in the resolution scheme. The Council provides reasons for its objection. - If the Council objects to the resolution scheme on the ground that it does not fulfill the public interest requirement, the entity is orderly wound up in accordance with applicable national insolvency law. - The EC must approve the use of the SRF or any other State aid.1 - The resolution scheme may enter into force only if no objection has been expressed by the Council, or by the EC, within 24 hours after transmission. - Within 8 hours, the SRB modifies the resolution scheme in accordance with reasons expressed by the EC or by the Council. - The SRB instructs the Central Bank of Ireland on the resolution scheme. - The Central Bank of Ireland prepares a proposed resolution order for submission to the court where it is satisfied conditions for resolution have been met and it has obtained the written consent of the Minister, if required.2 - Footnotes: - 1 The European Commission’s state aid rules on support measures in favor of banks in the context are set out in the Banking Communication of July 30, 2013, 2013/C 216/01. - 2 Under Regulation 9 of the IRL BRRD Regulations, the Central Bank of Ireland must obtain the prior consent of the Minister before making a proposed resolution order, where the proposed resolution action would have a direct fiscal impact on the State or the decision would have systemic implications. ### Annex III — Resolution of Credit Unions - Credit Unions context and statistics (by end 2015): - 354 credit unions - total assets of approximately €15 billion (about 4 percent of banking assets) - 3.2 million members - total savings of €12.7 billion - Legal and resolution framework: - Credit Unions regulated and supervised by a Registrar of Credit Unions at the Central Bank of Ireland. - The Central Bank and Credit Institutions (Resolution) Act 2011 (CBCIR) provides the resolution regime for dealing with failing credit unions. - Resolution actions available under the CBCIR (also previously applied to banks): - The transfer of assets and/or liabilities (full or partial) to another entity, possibly supported by consideration from the CIRF; - The appointment of a Special Manager; - The creation of bridge bank capitalized by the CIRF, to which transfer of assets and/or liabilities to same; - A modified liquidation process (which applies to banks as well as credit unions). - Use of resolution tools requires ex ante judicial approval. - Conditions for applying the first three resolution actions (Central Bank may apply if either Condition A or Condition B is fulfilled, and Conditions C and D are both fulfilled, and the Central Bank has consulted the Minister for Finance): - Condition A: Central Bank has serious concerns relating to financial stability of the credit union and directs the credit union to take a particular action and the credit union fails to comply or is incapable of taking necessary actions, or Central Bank is satisfied that concerns cannot be adequately addressed by such directions due to urgency or other reason. - Condition B: Central Bank is satisfied there is a present or imminent serious threat to the financial stability of the credit union concerned or the financial system in the State. - Condition C: Central Bank is satisfied the credit union has failed or is likely to fail to meet a regulatory requirement imposed by law or a requirement or condition of its license or authorization. - Condition D: Immediate winding up of the credit union is not in the public interest. *International Monetary Fund — Ireland: selected excerpts from _cr16313 (pages and annexes provided in source content)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16313.pdf_