Central Bank And Credit Institutions (Resolution) Bill 2011 - Economic Analysis

On 28 February 2011, the Central Bank and Credit Institutions (Resolution) Bill 2011 (the "Bill") was published by the outgoing Government. Its purpose is to provide an effective and expeditious resolution regime for certain credit institutions at the least cost to Ireland. If enacted, the Bill will provide a permanent regime for the resolution of certain failing institutions. The current emergency legislation, the Credit Institutions (Stabilisation) Act 2010 (the "Stabilisation Act") lapses on 31 December 2012 unless extended, and applies only to a limited class of credit institution in any case.

The Bill was initiated in the Seanad in response to the requirement under the EU-IMF Programme of Financial Support for Ireland to introduce legislation on a special bank resolution regime by the end of the first quarter of 2011. The Bill is at the first stage of the legislative process and the current text may be subject to amendment, particularly as the new Government will now determine its future.

APPLICATION

The Bill will apply to "authorised credit institutions" meaning:

banks licensed under the Central Bank Act 1971;
building societies incorporated, or deemed to be so incorporated, under the Building Societies Act 1989; and
credit unions registered as such, or deemed to be so registered, under the Credit Union Act 1997.

Unlike the Stabilisation Act, the Bill will apply to banks irrespective of whether they have received financial support from the State.

While the Stabilisation Act is in operation, an authorised credit institution that is a "relevant institution" for the purposes of the Stabilisation Act will not be subject to the Bill. Therefore if the Bill is enacted, its provisions will only apply to those banks licensed in Ireland which have not received financial support from the State. Once the Stabilisation Act has expired, all banks will be subject to the same resolution legislation.

HIGH LEVEL SUMMARY OF THE BILL

Powers of resolution

Under the Bill, where certain pre-conditions are met, the Central Bank of Ireland (the "Central Bank") has the power to:

propose an order for the transfer of all or any specified part of the assets or liabilities of an authorised credit institution (a "Proposed Transfer Order"); and
propose an order for the appointment of a special manager to an authorised credit institution (a "Proposed Special Management Order").

The powers of the Central Bank to make such orders are similar to those granted to the Minister for Finance (the "Minister") under the Stabilisation Act. The Bill will also:

establish a Credit Institutions Resolution Fund (the "Fund") to provide a source of funding for the resolution of financial instability in, or an imminent serious threat to the financial stability of, an authorised credit institution;

empower the Central Bank to establish "bridge-banks" to hold assets or liabilities transferred pursuant to a
transfer order;
empower the Central Bank to present a petition to the High Court for the winding up of a credit institution; and
empower the Central Bank to direct that an authorised credit institution prepare and implement a recovery plan and empowers the Central Bank to prepare a resolution plan for the institution.

Vesting of powers

Unlike the Stabilisation Act the resolution powers under the Bill are to be vested in the Governor of the Central Bank, rather than the Minister. However the Minister will be given certain powers, such as to make financial incentives available to any proposed transferee under a transfer order.

The Bill will not affect the independence of the Central Bank nor the Governor of the Central Bank in the performance of their functions.

THE FUND

The Fund will provide resources for the resolution of an authorised credit institution. The Fund shall be constituted by contributions made by authorised credit institutions, any sums paid into it by the Minister and interest on those contributions. The Minister will be entitled to be reimbursed from the Fund for all contributions made and for any financial incentives given to a proposed transferee.

The Central Bank will manage and administer the Fund and shall set the rate of interest payable on money standing to its credit, but the Central Bank shall not contribute to the Fund from its own resources. Failure to contribute to the Fund in accordance with regulations made by the Minister will constitute an offence. An authorised credit institution will not be permitted to carry on the business of a credit institution unless it contributes to the Fund.

BRIDGE-BANKS

A bridge-bank will be a private company limited by shares, formed and wholly-owned by the Central Bank or its nominees for the purposes of the Bill and in particular for holding assets or liabilities transferred pursuant to a transfer order made under the Bill. A bridge-bank may hold the assets and liabilities on a temporary basis, with a view to their transfer as soon as practicable. While the Central Bank will be prohibited from providing capital to a bridge-bank from its own resources, it may use the Fund for this purpose. A bridge-bank will be taken to be the holder of banking licence and will be regulated in the normal fashion.

A bridge-bank is not necessarily a good or bad bank, but will allow for the normal functioning and servicing of the assets and liabilities of a failed institution before a buyer can be found. This should allow for a swift and orderly resolution of the failed institution while transfer negotiations are ongoing.

Regulations may be made by the Central Bank in consultation with the Minister, or vice versa, in relation to the formation, administration and operation of bridge-banks and for related matters.

ORDERS UNDER THE BILL

The provisions of the Bill and the Stabilisation Act in relation to orders for the transfer of assets and liabilities and to appoint a special manager to a credit institution are very similar.

Pre-conditions

Under the Bill, the Central Bank may make a Proposed Transfer Order and / or a Proposed Special Management Order (together, the "Proposed Orders") in relation to an authorised credit institution, or a subsidiary or holding company of an authorised credit institution, if it decides that:

the intervention conditions are fulfilled in relation to that credit institution; and
a Proposed Order is necessary in all the circumstances.

The intervention conditions include a requirement that the Central Bank must:

have consulted with the Minister;
either:
1. have serious concerns relating to the financial stability of the authorised credit institution concerned and
  - have made a direction which has not been complied with, or which the credit institution is incapable of complying with; or
  - is satisfied that its serious concerns cannot be adequately addressed by a direction,
  or
2. be satisfied that there is a present or imminent threat to the financial stability of the authorised credit institution or the financial system; and
be satisfied the authorised credit institution has or is likely to fail to meet a regulatory requirement and having regard to the purposes of the Bill and other specified matters the immediate winding-up of the authorised credit institution concerned is not in the public interest.

High Court Order

Under the Bill, the Central Bank must apply to the High Court, ex parte, for an order (a "High Court Order") in the terms of the Proposed Order. Save in exceptional circumstances (as specified in the Bill) or in cases where the authorised credit institution consents to the making of a High Court Order in the terms of a Proposed Order, notice must be served on an authorised credit institution, subsidiary or holding company before an application is made.

If in a Proposed Order:

the Central Bank has declared the intention of preserving or restoring the financial position of a credit institution; and
the High Court is satisfied that the Proposed Order has that intention,

the High Court shall declare that the High Court Order (or part thereof) is a re-organisation measure so as to be recognised on an EU wide basis in accordance with the provisions of Directive 2001/24/EC as implemented in Ireland by the EC (Reorganisation and Winding Up of Credit Institutions) Regulations 2011.

The Bill also provides that the High Court may in specified circumstances amend or vary the content of the High Court Order from the Proposed Order, and that the High Court will, if satisfied that it is necessary in all of the circumstances, direct that the High Court Order (or in the case of a transfer order, all of the order or a particular term) will have immediate effect.

The Central Bank may, in certain specified circumstances, apply to the High Court to vary the terms of a High Court Order and an application to set aside a High Court Order can be made by certain affected institutions.

Effect of orders on certain other obligations

The Bill provides that various actions or events in respect of the Bill, including the use of any powers under the Bill, will not trigger certain events in agreements to which an authorised credit institution, subsidiary or holding company or sister company are a party to or in which they have an interest. Therefore, by way of example, the making of a Proposed Order should not trigger events of default under bonds or derivative contracts.

Transfer of Assets and Liabilities

The Bill will allow the Central Bank to make a Proposed Transfer Order setting out the terms and conditions of the proposed transfer. In certain specified circumstances the Central Bank may propose that a transfer is effected to a bridge-bank. The High Court Order confirming the Proposed Transfer Order (the "Transfer Order") may transfer all or any specified part of the assets or liabilities, or any combination thereof, of an authorised credit institution or a subsidiary or holding company of that credit institution. On or after the transfer, the transferee has the same rights and obligations as the transferor had immediately prior to the transfer.

The Bill would allow the Minister to provide a financial incentive to any person to become the transferee (including a bridge-bank) of an asset or liability under a Transfer Order, including by way of payment, loan, guarantee, exchange of assets and other financial support. Any such financial assistance provided constitutes a debt due and owing to the Fund by the transferor. The Minister may recover from the Fund the amount of any financial incentive provided.

A number of provisions of the Bill allow for the effective transfer of assets and liabilities without the usual formalities. A transferee can also obtain the benefit of the security relating to the asset or liability without having to become the registered owner of such security.

A Transfer Order shall be effective for foreign as well as domestic assets and liabilities and the Bill provides that, where the transfer is permitted by the governing law, the transferor (and a transferee in the case of a liability) will do everything required to effect the transfer or assignment. If the governing law does not permit such assignment or transfer:

the transferee shall be responsible for discharging the transferor's obligations on assignment or transfer of a liability; and
the transferor will be under a duty to do all that is possible to assign to the transferee the greatest possible interest on assignment or transfer of an asset.

The Bill specifies that any assignments or transfers in connection with a Transfer Order will not be subject to stamp duty.

Special Management

The Bill provides that the Central Bank can make a Proposed Special Management Order to appoint a person as special manager of an authorised credit institution, or a subsidiary or holding company of that credit institution who has, in the Central Bank's opinion, the requisite knowledge, expertise and experience of the financial services sector to be a special manager of the particular institution.

A special manager can be appointed for a fixed period (which may be extended) and paid out of funds available to the credit institution, subsidiary or holding company concerned. The special manager will be tasked with taking over the management of the business or the relevant part of the business of the credit institution, subsidiary or holding company concerned. Unlike the Stabilisation Act, a special manager appointed pursuant to the Bill will be able to not only manage the business, but also to wind down the business in certain circumstances.

The Bill provides a number of powers to a special manager to assist in the performance of their functions as follows:

power to appoint or employ persons;
power to apply to the High Court, with the consent of the Central Bank, to determine a question arising in the course of the special management;
the functions of the directors, and with the prior consent of the Central Bank the powers of the authorised credit institution, subsidiary or holding company exercisable by general meeting, may only be exercisable by the special manager;
power to remove, with the prior consent of the Central Bank or as directed by the Central Bank, a director, officer, secretary, employee or consultant of an authorised credit institution, subsidiary or holding company; and
power to determine the role (if any) and remuneration (if any) of the directors and officers;

Crucially, the Bill provides that the special manager may, with the consent of the Central Bank, substitute his or her own decision for any decision that would otherwise be made by the members, and any such decision will be taken to be the decision of the members.

The Bill specifically provides that while an authorised credit institution, subsidiary or holding company is under special management, the prior written consent of the Central Bank is required before certain actions are taken in respect of that business, including: (a) its winding-up; (b) the appointment of an examiner, inspector or receiver; or (c) the enforcement of a judgement against it.

LIQUIDATION OF AUTHORISED CREDIT INSTITUTIONS

The Bill proposes to empower the Central Bank to present a petition to the Court for the winding up of an authorised credit institution on certain specified grounds, such as:

where in the opinion of the Central Bank the winding up is in the public interest or the credit institution is unable to meet its obligations;
it has failed to comply with a direction of the Central Bank;
it has had its licence or authorisation revoked; or
it is in the interests of depositors that the credit institution be wound up.

A person other than the Central Bank cannot present a petition or take related steps unless 10 days' written notice is given to the Central Bank and it has confirmed in writing that it does not object. Only a liquidator which is approved by the Central Bank can be appointed. In addition, the Central Bank will have certain rights to notice and of participation even where it is not a creditor or the petitioner.

The Bill also proposes to alter the objectives of a liquidator so that the primary objective is to facilitate the Central Bank in ensuring eligible depositors receive the prescribed amount payable under the EC (Deposit Guarantee Schemes) Regulations 1995 (under which eligible deposits are protected up to an amount of €100,000) or in transferring that amount to another authorised credit institution or credit institution approved of by the Central Bank to hold on behalf of each such eligible depositor. Any such transfer takes effect without restriction, for instance a restriction on assignment or a requirement for consent.

As soon as practicable after a winding-up order is made by the High Court, a liquidation committee shall be set up comprising of two nominees of the Central Bank and one nominee of the Minister. The function of the committee is to ensure that the liquidator properly carries out his or her functions.

RECOVERY PLANS AND RESOLUTION PLANS

Recovery plans

Under the Bill, having regard to the nature of the business of an authorised credit institution, the Central Bank may direct it to prepare a recovery plan. The recovery plan will set out actions that could be taken to facilitate the continuation, or secure the business or part of the business, of that credit institution. If the Central Bank is of the opinion that the actions contained in that plan or part of it are necessary or desirable, it may direct that it be implemented by the authorised credit institution.

Resolution plans

Under the Bill, following a direction for the preparation of a recovery plan, the Central Bank may prepare a resolution plan. The Central Bank may direct the institution to provide such information and analysis the Central Bank requires for this purpose. The plan will set out the Central Bank's preparations on a contingency basis for the exercise of its functions under the Bill in relation to that credit institution.

MISCELLANEOUS PROVISIONS

The miscellaneous provisions under the Bill largely reflect those enacted in the Stabilisation Act. Provision is made to provide for the confidentiality of the fact that a Proposed Order is to be made and for the confidentiality of proceedings in relation to the Bill in certain circumstances.

The Bill will restrict rights of judicial review in respect of decisions made under the Bill as well as placing limitations on certain rights of appeal to the Supreme Court.

As was the case under the Stabilisation Act, the operation of certain legislation providing for netting, settlement finality and the protection of financial collateral in relation to an agreement to which an authorised credit institution or any of its subsidiaries or its holding company is a party, is not affected by the Bill. Asset covered securities are similarly not affected.

LINKS:

The Bill as initiated:
Oireachtas - Central Bank and Credit Institutions (Resolution) Bill 2011

Explanatory memorandum:
Oireachtas - Central Bank and Credit Institutions (Resolution) Bill 2011 - Explanatory and Financial Memorandum

Arthur Cox briefing on the Stabilisation Act:
Arthur Cox - Credit Institutions (Stabilisation) Act 2010, December 2010

Text of the Stabilisation Act:
Oireachtas - Credit Institutions (Stabilisation) Act 2010

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

Ireland: Central Bank And Credit Institutions (Resolution) Bill 2011