New law to give Central Bank more powers

THE LEGISLATION to put in place a special resolution regime for banks and give the governor of the Central Bank the power to intervene in their affairs is to be published today.

The new Dáil sits on March 9th and the new government will have to decide on a timetable for the enactment of the legislation.

A commitment to the publication of such a piece of legislation was contained in the agreement between the Government and the EU-IMF, signed in December.

The new law will be used to intervene in the affairs of distressed financial institutions and will replace the Credit Institutions (Stabilisation) Act, introduced late last year. The new Bill will give powers to the governor of the Central Bank, Prof Patrick Honohan, which are delegated to the minister for finance in the Credit Institutions Act.

The EU-IMF deal with the Government said legislation on improved procedures for early intervention in distressed banks and a special bank resolution regime (SRR) would be introduced.

“The SRR should include a robust set of powers and tools to ensure the competent authorities can promptly and effectively resolve distressed banks, eg, when they pose a risk to financial stability. The legislation will be consistent with the EU treaty rules and will be consistent with similar initiatives ongoing at EU level,” the agreement stated.

In December, the Government committed to publish the law by the end of February and that it would broaden the available resolution tools with the aim of promoting financial stability and protecting depositors.

“In particular, the draft legislation will provide for the appointment of a special manager where, in the opinion of the Central Bank, an institution’s financial condition has severely deteriorated; grant powers to the Central Bank for the transfer of assets and liabilities to other institutions and create a framework for the establishment of bridge banks.”

The UK introduced bank resolution legislation in February 2009. The absence of such legislation in most jurisdictions is widely seen as having hindered governments’ efforts to deal with distressed banks and the 2008 financial crisis.

The Credit Institutions law, introduced late last year, was used to transfer billions in deposits last week out of Anglo Irish Bank and Irish Nationwide.

In the report he drafted on the banking crisis, Prof Honohan said the Government’s decision not to allow a bank to fail downplayed the importance of resolution legislation.

The Credit Institutions Bill was published and enacted within a week in December. At the time minister for finance Brian Lenihan said a comprehensive restructuring of the retail banking system was a key pillar of the EU-IMF agreement.

The law, he said, would allow him take actions needed to bring about a domestic retail banking system that is proportionate to and focused on the economy.