Annex I. Early Intervention Powers
The Central Bank of Ireland and/or the ECB, as appropriate, may take a series of increasingly intrusive measures to intervene in an ailing bank as different thresholds are crossed.
Threshold 1: Where a credit institution does not meet (or is likely to breach within the subsequent 12 months) the prudential requirements set forth in the CRD IV (or ILR CRD IV Regulations) or the CRR or the competent authority determines through the supervisory process that processes implemented by the credit institution and own funds and liquidity held by it do not ensure sound management and coverage of risks (i) the competent authority may apply the powers that follow to the credit institution, and (ii) the ECB may apply the powers that follow to the holding company of such credit institution.
Powers available to the ECB or the Central Bank of Ireland under the IRL CRD IV Regulations (Regulation 92) and to the ECB under the SSM Regulation (Article 16(2)):
a. require institutions to hold additional own funds;
b. require the reinforcement of the arrangements, processes, mechanisms and strategies implemented regarding the ICAAP, governance, recovery and resolution plans;
c. require institutions to present a plan to restore compliance with supervisory requirements pursuant to the IRL CRD IV Regulations and the CRR, and set a deadline for its implementation, including improvements to that plan regarding scope and deadline;
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 to request the divestment of activities that pose excessive risks to the soundness of an institution;
f. require the reduction of the risk inherent in the activities, products and systems of institutions;
g. require institutions to limit variable remuneration as a percentage of net revenues where it is inconsistent with the maintenance of a sound capital base;
h. require institutions to use net profits to strengthen own funds;
i. restrict or prohibit distributions or interest payments by an institution to shareholders, members or holders of Additional Tier 1 instruments, where the prohibition does not constitute an event of default of the institution;
j. impose additional or more frequent reporting requirements, including reporting on capital and liquidity positions;
k. impose specific liquidity requirements, including restrictions on maturity mismatches between assets and liabilities;
l. require additional disclosures; and
m. remove at any time, members from the management body of a credit institution who do not fulfill the specific requirements applicable to it. (Available only to the ECB under the SSM Regulation).
Powers available to the ECB or the Central Bank of Ireland under the IRL BRRD Regulations (Regulation 39):
a. direct the institution, or its management body, to implement one or more of the arrangements or measures set out in the recovery plan;
b. direct the institution, or its management body to update the recovery plan, where the circumstances that led to the early intervention differ from the scenarios on which the recovery plan was based, and implement one or more of the arrangements or measures set out in the updated plan within a specific timeframe in order to ensure that the circumstances giving rise to the early intervention measures no longer exist;
c. direct the institution, or its management body, to assess its situation, identify measures to overcome any problems identified and draw up an action program to overcome those problems and a timetable for its implementation;
d. direct the institution, or its management body, to convene a meeting of shareholders of the institution;
e. directly convene a meeting of shareholders of the institution, where the institution, or its management body, fails to comply with a direction under subparagraph (d);
f. set the agenda for a meeting of shareholders, convened after a direction under subparagraph or convened under subparagraph (e), and require certain decisions to be considered for adoption by shareholders at that meeting;
g. exercise any of the Bank’s powers under the 2010 Act (in accordance with the allocation of powers to any particular officer or employee of the Bank 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 of its creditors in accordance with its recovery plan, where applicable;
i. direct the institution to make changes to its business strategy;
j. direct the institution to make changes to its legal or operational structures; and
k. acquire, including through on-site inspections, any information necessary to update the resolution plan and prepare for the possible resolution and for valuation of the assets and liabilities of the institution and provide any such information to the resolution authority.
Threshold 2: Under IRL BRRD Regulations (Regulation 40–45), where: (A) (i) there is a significant deterioration in the financial position of an institution; or (ii) there are serious infringements by the institution, or its management body, of national law (including under any enactment or rule of law) or of the constitution of the institution, or (iii) there are serious administrative irregularities, and (B) early intervention measures taken in accordance with Regulation 39 of the IRL BRRD Regulations would not be sufficient to reverse that deterioration, or remedy those infringements or irregularities, the competent authority may remove some or all of the senior management or management body of the institution concerned.
Threshold 3: Under IRL BRRD Regulations (Regulation 46–60), where the competent authority is of the opinion that—(a) the conditions for the removal of some or all of the senior management or management body of the institution laid down in Regulation 40(1) are met,(b) the removal of senior management or management body would be insufficient to remedy the situation giving rise to those conditions, and (c) a temporary administration order is necessary in all the circumstances, it may make a proposed temporary administration order in relation to an institution.
Annex II. Triggering Resolution in Ireland
Triggering resolution of Irish Banks under the SRB’s jurisdiction requires the following (chart below):
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 having regard to timing and other relevant circumstances there is no reasonable prospect that any private sector measure or early intervention measure would prevent the failure of the institution. The ECB may also inform the SRB that this second condition for resolution is met.
The SRB adopts a resolution scheme once it determines that a 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 the discretionary aspects of the resolution scheme in the cases not covered below (i.e. 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 requirement that resolution is required in the public interest, the entity is orderly wound up in accordance with the 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 the reasons expressed by the EC, in its aforementioned objection, or by the Council, in its approval of the modification proposed by the EC.
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 that the conditions for resolution have been met and it has obtained the written consent of the Minister, if required.2 The Central Bank of Ireland applies to the court for a resolution order.
Annex III. Resolution of Credit Unions
Credit Unions, co-operative deposit taking institutions owned and controlled by their members, are regulated and supervised by a Registrar of Credit Unions at the Central Bank of Ireland. By end 2015, there were 354 credit unions with total assets of approximately €15 billion (about 4 percent of banking assets), 3.2 million members and total savings of €12.7 billion. The Central Bank and Credit Institutions (Resolution) Act 2011 (CBCIR), which previously applied to banks,1 provide the resolution regime for dealing with failing credit unions. The resolution actions which can be taken by Central Bank of Ireland the under the CBCIR are:
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 to transfer of assets and/or liabilities to same; and
A modified liquidation process (which applies to banks as well as credit unions).
The use of the resolution tools, including liquidation, require ex ante judicial approval. The Central Bank of Ireland may apply the first three resolution actions if either condition A or condition B is fulfilled, and conditions C and D are both fulfilled, and the Central Bank of Ireland has consulted the Minister for Finance:
Condition A: the Central Bank of Ireland has serious concerns relating to the financial stability of the credit union concerned and directs the credit union to take a particular action and the credit union fails to comply with that direction or is incapable of taking the necessary actions to comply fully with directions from the Central Bank of Ireland or the Central Bank of Ireland is satisfied that, having regard to the urgency of the situation or for any other reason, its serious concerns cannot be adequately addressed by such directions.
Condition B: is that the Central Bank of Ireland is satisfied that 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: is that the Central Bank of Ireland is satisfied that the credit union concerned 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: is that the immediate winding up of the credit union is not in the public interest.
This note was prepared by Marc Dobler (Monetary and Capital Markets Department) and Dinah Knight (Legal Department). The authors would like to acknowledge Hans Weenink (Legal Department) and David Scott (External Expert for the Monetary and Capital Markets Department) for their valuable collaboration on this note.
As with all EU Directives, the CRD IV (Directive 2013/36/EU) and the BRRD (Directive 2014/59/EU) are not directly applicable in member states and must be transposed into national legislation. EU regulations such as the CRR (Regulation (EU) 575/2013) and EBA binding technical standards, which are adopted by the European Commission, become part of national law across the EU without further action by member states. This combination of legislative instruments balances the need for national discretion in some areas and uniformity in other areas where divergent approaches may lead to uncertainty or regulatory arbitrage.
Unless otherwise noted, references to banks, credit institutions, significant institutions, and less significant institutions include the bank and entities in the banking group that are subject to consolidated supervision.
EU Regulations 1024/2013 (the “SSM Regulation”) and 468/2014 (the “SSM Framework Regulation) establish the division of labor and cooperation arrangements between the ECB and NCAs under the SSM.
The ECB ranks LSIs (high, medium, or low priority) to perform oversight over the NCAs’ supervision in a proportionate manner, including by developing supervisory standards and policies for LSIs, and requiring reporting from NCAs. The classification is based upon impact and risk of the LSI on the domestic financial system and is annually reviewed.
The CRD IV and the BRRD have been transposed to Statutory Instrument 158 of 2014 (the “IRL CRD IV Regulations”) and Statutory Instrument 289 of 2015 (the “IRL BRRD Regulations”), respectively.
SSM Regulation Article 6(5)(b).
SSM Regulation Articles 4(3), 6(3) and 9(1). As a result, the powers available to the ECB across the Banking Union are not uniform. The ECB has developed the means to track the particularities of the powers available in each jurisdiction.
The requirements for institutions to prepare recovery plans and for the competent authority to assess them are contained in CRD IV Article 74 (transposed to IRL CRD Regulations, Regulation 61); BRRD Articles 5 to 9 (transposed to IRL BRRD Regulations, Regulations 11–16); and SSM Regulation Article 4.1(i). The EBA has developed regulatory technical standards on the content and the assessment of recovery plans (Draft EBA/RTS/2014/11 and EBA/RTS/2014/12); as well as guidelines on the range of scenarios to be used for recovery plans (EBA/GL/2014/06).
The ECB has established four dedicated Directorates General (DGs) on Micro-Prudential Supervision to perform the supervisory tasks conferred on the ECB in cooperation with NCAs. DGs I and II are responsible for the direct day-today supervision of SIs; DG III is responsible for the oversight of the supervision of LSIs performed by NCAs; DG IV performs horizontal and specialized tasks in respect of all credit institutions under the SSM’s supervision and provides specialized expertise on specific aspects of supervision, for example internal models and on-site inspections.
Powers to remove management under Irish law provide an example of divergent national powers available under the SSM. Under Irish Law, the competent authority may order the suspension of duties of a member of senior management or the management body of a bank with immediate effect, however, final removal of the person from office is subject to court approval.
BRRD Article 59; SRM Regulation Article 21; IRL BRRD Regulations, Chapter 4.
Depfa Bank, plc, an Irish-licensed bank, was formerly a subsidiary of the German Hypo Real Estate group, but has been fully owned by the German government since December 2014. Depfa, which is in the process of winding down its operations, has been identified as an LSI by the ECB, but qualifies as a cross-border bank for purpose of the SRM.
EU Regulation No. 806/2014.
The SRB only participates in ECB Supervisory Board meetings upon invitation, for items related to its tasks and responsibilities (such as deliberations on recovery plans or the deteriorating financial conditions of an institution).
AIB has 30 branches and 21 business centers in the UK, while BOI provides retail financial services via the UK postal service network. For 2015, 44 percent of BOIs loan portfolio was booked in the UK subsidiary.
Citibank Europe PLC is currently identified as an LSI.
It also worth noting the recapitalization required by ACCBank from its parent (Rabobank).
Under the BRRD, GLRA means the resolution authority in the member state where the consolidating supervisor is located (BRRD Article 2.44).
The BRRD and IRL BRRD Regulation require members of the resolution college to take joint decisions on certain matters, such as on setting MREL requirements and adopting resolution plans. In practice, the members take coordinated but independent action by written procedure following discussions in the resolution colleges.
Due to the strict requirements for operational separation between resolution functions and supervisory functions, NCAs are not eligible for participation in resolution colleges. Since the Central Bank of Ireland is a unified central bank, it has relied on its internal processes—for example, monthly meetings between supervisory and resolution staff—to ensure adequate information exchange between the supervision and resolution functions. For EU member states operating under a different institutional architecture, greater flexibility for NCAs to participate in resolution colleges may be warranted.
See SRM Regulation, Recital 91.
Final draft RTS on resolution colleges (EBA/RTS/2015/03).
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 however held for PTSB in December 2015.
In contrast, as between EU member states, the BRRD imposes significant consultation requirements—in addition to the resolution college requirements.
In part, this relates to the lack of clarity in the BRRD as to which authority should take the lead in establishing and organizing “European resolution colleges” whereas for “resolution colleges”, it specifies that GLRAs take the lead.
Article 18(4) of the SRM Regulation sets out criteria for when a bank is considered failing or likely to fail. The EBA has issued guidelines regarding the interpretation of the different circumstances when an institution shall be considered to be failing or likely to fail.
With respect to an LSI, the Central Bank of Ireland is responsible for determining whether these three conditions have been satisfied. Regulation 62 of the IRL BRRD Regulations.
Regulation 104 and 105 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 the implementation of resolution order, while a decision to set aside the resolution order is pending. The court may grant a stay or injunction 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. In ruling on the substantive action, the court will apply the same the standard of review as applied on granting the resolution order.
Under Regulation 148 of the IRL BRRD Regulations, a person may not apply to the court for judicial review of Central Bank of Ireland resolution actions after the 48-hour window expires where they were entitled to apply for the resolution order to be set aside but did do so or were unsuccessful. 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.
Article 86 of the SRM Regulation.
For example, the Dodd Frank Act in the USA triggers Title II resolution automatically if the court does not make a decision within 24 hours.
Section 29 et seq of the 2011 Act.
Regulation 106 of the IRL BRRD Regulations.
Regulation 114 of the IRL BRRD Regulations. The enumerated powers include, for example, the powers to substitute its own decision for a decision of the shareholders and the management body of the institution under resolution in order to implement actions foreseen in the SRB resolution scheme and High Court order and the power to suspend payment or delivery obligations subject to the parameters establish by the IRL BRRD Regulations.
Article 32 of the BRRD requires that a resolution action, power or tool be used only if in the public interest, and provided that winding up the institution under normal insolvency proceedings would not meet the resolution objectives to the same extent.
Article 86 of the BRRD provides that insolvency proceedings may only be commenced against an institution in resolution with the consent of the resolution authority and against any institution eligible but not yet subject to resolution with notice to the resolution authority and an opportunity to commence resolution.
BRRD Articles 43–44; SRM Regulation Article 27; IRL BRRD Regulations, Regulation 79–80.
BRRD Articles 38–39; SRM Regulation Article 24; IRL BRRD Regulations, Regulations 69–70.
BRRD Articles 40–41; SRM Regulation Article 25; IRL BRRD Regulations, Regulations 71–73.
Automatic recognition of “reorganization measures” under the Winding-Up Directive historically has worked well. Indeed, it was an essential instrument during the Irish banking crisis where it was relied upon to achieve cross-border enforceability of a subordinated liabilities order (i.e., a bail-in order) issued with respect to the subordinated debt of AIB. More recently, however, courts in two cases have refused to grant recognition where the action taken by the NRA did not precisely match the terms of the BRRD. See Goldman Sachs International v Novo Banco and Bayerische Landesbank v Heta Asset Resolution.
BRRD Article 42; SRM Regulation Article 26; IRL BRRD Regulations, Regulation 74.
BRRD Articles 56–58.
The BRRD also contemplates that public support could be provided without triggering resolution, if necessary to remedy a serious disturbance in the economy and preserve financial stability. Amongst other conditions, such support measures “shall be of a precautionary and temporary nature and shall be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the institution has incurred or is likely to incur in the near future.” In addition, such support could only be provided to solvent entities. BRRD Article 32(4)(d).
BRRD Article 45; SRM Regulation Article 12; Regulation 81 of the IRL BRRD Regulations.
The draft EBA RTS on MREL, which was not adopted at time of writing, proposed a maximum period of 48 months.
The combined buffer includes the capital conservation, countercyclical, systemic (either G-SIB or D-SIB and the systemic risk buffer).
For example, the Germany authorities have adopted a statutory solution by changing the law to subordinate senior debt in bank insolvencies, making existing bonds MREL eligible. Whereas other countries, including France and Spain, are taking a contractual approach subordinating MREL.
Article 12 (1) of the SRM Regulation provides the SRB with the general power to set MREL, however Article 12 (8) only empowers the SRB to determine MREL on an individual basis for institutions and on a consolidated level for parent undertakings. The Irish authorities consider that it may not give the SRB the power to determine MREL on an individual basis for holding companies as unlicensed holding companies are not deemed institutions.
For example, vulture funds seeking to test contractual subordination in debt contracts of banks in resolution.
The IGA was ratified by a sufficient Member States by November 30, 2015 to ensure that the regime took full effect from January 1, 2016. http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%208457%202014%20INIT
Article 73 of the SRM Regulation provides for the ability to borrow from the private sector.
A recommendation of the Five Presidents’ Report: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf
This IMF paper discusses introducing a formal systemic risk exemption into the BRRD, see Box 4: https://www.imf.org/external/pubs/ft/sdn/2013/sdn1301.pdf
SRM Regulation, Recital 78. Note that this is calculated on total liabilities including own funds, unlike regulatory capital, which is calculated on the basis of risk weighted assets.
“Any state aid notified to the Commission after [1 January 2016] that triggers resolution under the BRRD can only be approved subject to bail-in of at least eight percent of the bank’s total liabilities, which may require also converting senior debt and uncovered deposits.” http://europa.eu/rapid/press-release MEMO-15-6394 en.htm
For example, a common shock to small deposit takers without MREL but which due to wider contagion risk, such as in the savings and loans crisis in the US in the 1980s and 90s, could no longer be liquidated as originally planned.
Article 1(2) Indirect Recapitalization Guideline, which was used to disburse €41 billion to the Spanish banking sector (originally via the ESFS and then the ESM when the latter came into effect in September 2012).
A simple example may be illustrative. If a failed bank was liquidated, and insured deposits paid out, the net cost for the DGS is estimated at €10. A resolution could instead be effected by transferring deposits of €60, backed by assets from the failed bank. But if the transferee would only accept €40 of ‘good’ assets from the failed bank, this interpretation would prevent the DGS injecting the difference (€20 million) even if its estimated resolution costs, net of recoveries, were €5 i.e., a better outcome.
Section 5B(d) provides the Central Bank of Ireland with a general power to lend against security to credit institutions, which may be exercised in pursuit of the Central Bank of Ireland’s financial stability objective provided by Section 6A(2)(a) of the 1942 Act.
The Credit Institutions (Financial Support) Act 2008 provides that the Minister may provide financial support to banks, including by indemnifying the Central Bank for the provision of ELA. This can be further extended by ministerial order beyond June 2018.
The NCB must inform the ECB as early as possible prior to extending assistance above €500 million.
The role of the ECB relating to the liquidity support provided during the Irish crisis has been closely examined. See: http://www.ecb.europa.eu/press/html/irish-letters.en.html and http://www.ecb.europa.eu/press/key/date/2015/html/sp151112 Transcript and QandA.en.pdf
See p. 66 of ECB Annual Report 2010 and https://www.ecb.europa.eu/press/pr/date/2013/html/pr131031.en.html
An accounting reclassification took place, in April 2012, in order to harmonize the disclosure of ELA provided by Euro system central banks to domestic credit institutions under ‘Other Claims on Euro Area Credit Institutions in Euro’ in the weekly consolidated financial statement of the Euro system.
For example, see the Bank of England on only reporting its ELA to HBOS and RBS on a delayed basis: http://www.bankofengland.co.uk/publications/Documents/other/treasurycommittee/financialstability/ela091124.pdf.
While there are currently no Euro system rules in place requiring NCBs to publish their individual balance sheets on a regular basis, ECB Guideline (ECB/2010/20) recommends that NCBs should apply the same reporting rules to national reports “to the extent possible” for consistency and comparability reasons.
Which provides asset and liability management services to the government, including with respect to its ownership interest in the banking sector.
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.
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.
The liquidation procedure continues to apply to banks.