Wednesday 7 December 2016

Lenihan set to flag Central Bank power to take over lenders

'Living wills' with wind-down details will be demanded

Emmet Oliver and Joe Brennan

Published 19/03/2010 | 05:00

The Central Bank in Dublin. Photo: Bloomberg News
The Central Bank in Dublin. Photo: Bloomberg News

Finance Minister Brian Lenihan is expected to use his speech on the future of banking to flag new powers for the Central Bank to take control of faltering banks -- and wind them down if necessary.

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The Irish Independent has learnt the minister plans to signal his intention to bring forward radical bank resolution legislation, already in force in the UK.

Some sources suggested that banks may be required, as part of the new regime, to draft "living wills", which would set out how their operations could be wound down in a quick and orderly fashion in the event of failure.

The International Monetary Fund (IMF) highlighted last summer in its annual report on Ireland that the Government was "open to exploring the merits of a special bank resolution regime".

It is not clear, however, whether the rules will be included in a bill, to be published imminently, that will pave the way for the remerger of the Financial Regulator with the Central Bank after a seven-year separation.

Procedures

But it is likely that they will be along the lines of those established in the UK Banking Act 2009 to deal with failing banks, including new insolvency and administration procedures.

The US has long-established arrangements for resolving commercial banks that are at risk of collapsing.

However, it did not cover investment banks -- meaning US authorities did not have a clear way of dealing with Bear Stearns and Lehman Brothers when they were on the brink.

UK authorities

Similarly, the UK authorities' hands were tied in 2007 when Northern Rock became the first European bank to face a run on its deposits when the global financial crisis erupted.

The influential IMF said a banking resolution regime "would recognise the unique role played by banks in the economy and give the authorities the power to quickly transfer assets and deposits to another institution or to establish a bridge bank."

A bridge bank is an institution with a limited lifespan, into which the old bank is transferred to facilitate its sale.

Leading Irish economist Colm McCarthy wrote recently that the Government's options in September 2008 "in dealing with the failure of Anglo Irish Bank were constrained by the absence of resolution options".

He added: "Bank resolution legislation -- clarifying the power of the authorities to ensure that all providers of risk capital share quickly and appropriately the losses incurred by failed banks -- is an important component in the State's exit strategy from the banking collapse."

Irish Independent

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