THE European Central Bank (ECB) has warned the Government over extensive new powers it is seeking to wind up distressed banks in future financial crises.
The Frankfurt-based bank wants the Government to outline further how bondholders and other creditors will be protected if banks are wound up in future and temporarily taken into state ownership.
The rights of creditors and other third parties must be elaborated further, the Frankfurt bank is insisting. The bank is also insisting that the independence of Central Bank governor Dr Patrick Honohan is further protected in any new laws.
In an opinion signed by ECB president Jean Claude Trichet in the last fortnight, the bank said Ireland must "balance'' the rights of creditors with the stability of the financial system.
The bank wants a better system for valuing assets of the distressed banks when the government takes them over and puts the assets into so-called bridge banks.
"The ECB would welcome if the draft law would include some elaboration of the rights of transferors, creditors and other third parties as regards compensation,'' said the bank.
The bank said the Government's powers, included in the Credit Institutions (Resolution) Bill, did not include "any specific approach'' to valuing the assets that get moved out of a distressed bank.
The ECB said as a minimum it should be explained how assets will be valued in emergency conditions. "This is a precondition for a fair treatment of creditors and other third parties as their right to compensation may only be duly assessed against this information."
The bank also wants a specific section in any future legislation to protect the independence of the Central Bank and its governor, Dr Patrick Honohan. "An explicit reference should be made to the principle of central bank independence,'' said the opinion.
The Government, which inherited the legislation from the last administration, has also been told that it could be difficult in future for an Irish government to take over and control a subsidiary or holding company of a foreign bank.
"The ECB notes that these measures may only be enforceable against such foreign legal entities to the extent permitted under foreign law applicable to them,'' the bank said.