Ailing banks can be dealt with quickly under new law
THE Central Bank will soon be empowered to seize control of struggling banks, parachute new managers into them and sell off their assets -- all before the institutions become a threat to the banking system.
The sweeping new powers were unveiled in the Credit Institutions (Resolution) Bill, which was published in full yesterday and extends to both Irish and foreign-owned banks.
The legislation is designed to ensure that the Ireland is better prepared for future banking collapses and is able to resolve troubled institutions in a less expensive way.
The new Government will also wield significant power in the arrangement, since the Bill demands that the Central Bank "consult" with the Finance Minister before intervening.
The Central Bank is allowed to appeal to the High Court for either a bank's winding up or a special manager in a wide variety of circumstances including:
- if the Central Bank feels the action is "in the public interests".
- if the Central Bank feels the action is in depositors' interests.
- if the Central Bank feels an institution cannot honour its debts.
The Central Bank can also demand that a bank comes up with a 'recovery plan' to resurrect itself, or create a 'bridge' bank to hold assets for a transition period.
Institutions have limited rights of appeal through judicial review, while banks which refuse to comply with orders given under the act face fines of up to €10m.
When the act comes into force in 2012, banks will have to begin contributing to a resolution fund to finance future rescues on an ongoing basis.
The broad framework for the resolution plan was set out in the memorandum of understanding on Ireland's €85bn bailout, which specified the need for Ireland to:
- provide for the appointment of a special manager.
- grant powers to the Central Bank for the transfer of assets and liabilities.
- create a framework for benchmark.
The draft legislation appeared bang on the "end February" deadline imposed by the bailout partners.