Secret DoF document ruled out Bank Guarantee Feb 2008

Courtesy of Olivier Vandt on

(Go to politicalworld and Cactusflower’s post for the working links to the documents).

Now this is very interesting. If this is the quality of advice the Minister was getting from the Dept (Jan 2008) and in light of what the outside advice (MS) was in Sept / Oct 2008 this throws a whole new light on the Misters actions in Sept / Oct 2008, especially the whole bizarre MacWilliams episode.

The paper is a very good summary of what was learned from Northern Rock and does a very good job of outlining the pros and cons of the various deposit guarantee scenarios. Note not a mention of bond holders anywhere. What is very interesting is that the paper spells out in detail that the minister cannot extended any help to an insolvent bank but can legally extended help an illequid bank. The paper also mentions TBTF and what criteria might be used.

So Anglos death spiral starts in summer 2007. They try to bolster deposit flight using cross deposits from the other banks but Anglo slides inevitably into insolvency by the summer of 2008. By this stage Anglo has 20B / 30B in phony deposits from the other banks on its book, is looking at 20B/30B losses on its loan books (using actuarial pricing), and probably the same kind of paper losses on its public and private derivatives books.

By all criteria and by all advice the minister had received there was no legal grounds for the minister to save Anglo. It was not a TBTF institution so he could not extend liquidity to it. The paper goes into some detail about winding up procedures for failed banks so we know what the preferred position of the Dept was. And anyway, Anglo was insolvent not illiquid by all criteria so there was nothing the minister could do legally to save Anglo.

Then McWilliams publishes his bank guarantee article in a Sunday Paper (the timing of which I thought very odd at the time). This guarantee solve a whole bunch of legal problems for the minister. By moving it from a deposit guarantee of one institution to a general guarantee (deposits plus bonds) of the whole banking system it solves a whole bunch of legal problems for the minister at a stroke. Lump in Anglo in with the TBTF banks declare it a systemic liquidity problem and open the spigots.

So based on the evidence so far it would seem that the minister was fully aware at the time just how serious and egregious the fraud was at Anglo. If was not fully conversant with the issues at Anglo then I see no reason why he should not have followed the very good advice he was getting regarding a simple deposit guarantee scheme on an institution by institution basis. So I dont think he was bounced into a situation without knowing full well exactly what had been going on at Anglo, AIB etc and that with the exception of BOI they were all technically insolvent by the summer of 2008. I think during the early stages of the crisis he may have engaged in a lot of plausible deniability behavior but by the end of 2008 he had all the details.

I think there is more than enough evidence by this stage to bring multiple felony charges of ministerial malfeasance against the minister. But I’m certain that part of all the calculation all the time was a) this is Ireland, no one is ever brought to book for abuse of the public trust and b) in the exceptional case that anyone is ever held responsible the minister has a terminal cancer and will be dead by the time anything happens. Yes, they really are that cynical.

Fucking hell. Just started to read the first of the documents. It is stunning stuff. Not the content of it, but the clarity of purpose of it.

“It is very important to note that the CBFSAI is prohibited from providing ELA [Exceptional Liquidity Assistance] to an insolvent institution. Therefore if there is any concern that a financial institution seeking ELA is insolvent, the CBFSAI would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer.”
Now this guarantee would be to the CBFSAI, I believe, that it is indemnified against any losses that it might make should the insolvent bank go under.

Lots more in it. Shame it’s not quotable (scanned document).

Wow! Interesting stuff. Here’s a bit that caught my eye concerning the letter of comfort that was provided to Anglo.

Now here’s the really interesting thing. It emerged a few months ago (Comptrollers 2009 report) that a ‘letter of comfort’ was given to Anglo Irish Bank on the day of the Bank Guarantee 30th September 2008. Why? Because Lenihan knew that Anglo Irish Bank was insolvent.

Appendix 2 is fascinating. It gives an absolute roadmap for what to do with a bank and how to payoff depositors without having to treat them as parri passu with bondholders.

That can really be the only implication of a letter of comfort.

The document is also very clear on illiquidity leading to insolvency. By that stage, Anglo had been illiquid for so long…

The other document is on the NTMA and is equally eye-opening (though short enough to be ambiguous). The suspicion on here that the 20bn float the NTMA was holding was for the provision of liquidity to the banks appears to be true.

I’m not surprised FF are having a leadingship dance this weekend…

Nice one Coles2. This could be the government’s headache for this week.

For anyone harboring any doubt as to the complicity of FF in bailing out Anglo knowing full well it was insolvent long before, these documents will provide little solace. Lenihan is too smart to keep this to himslef, this was known at cabinet level IMO as well as in numerouse other circles, such as the AG, upper echelons of the CS, obviously the CB and FR as well as the movers and shakers like Desmond et al. I think this is why Desmond was so pissed a few months back, he knew they knew and decided to take a ridiculous punt back in 2008, i.e. lump Anglo in to the global financial meltdown, claim illiquidity, Lehmans effect, systemic importance, etc. to justify a blanket guarantee and hope that it all blew over before anyone knew. Remember these guys thought they were the inventors and patrons of the new paradigm, the Celtic Tiger was real to them, they really thought they could paste over the hole at Anglo and cover it with capital appreciations on the underlying assets and riding the back of a global recovery over a few years.
While the Irish legal system has no teeth to deal with this treachery, the electorate does, of course the rotten system does not provide much in the way of alternatives but that could all change quickly, Shane Ross going as an independant could be followed by 100 more, one can only hope.

That’s all way to complicated for most of the electorate to understand though. At least the detail in any case.

And that’s the worry. FF have never lost 2 elections in a row. They only get sin binned.

Maybe its different this time. :angry:

Document 37 - part 1

Financial Stability Issues — Scoping Paper

  1. Introduction
    The purpose of this paper is to identify significant issues relating to the options available to the Irish authorities in the case of a systemic threat to financial stability, as well as consider any issues regarding the structures currently in place to oversee financial stability planning arrangements and also to manage a financial crisis. It examines the legal framework within which any crisis management operations must take place and any possible questions regarding the legal powers available to the Minister and the Central Bank and Financial Services Authority of Ireland (CBFSAI). The paper also includes some analysis of the recent difficulties in the UK financial system, following the experience of Northern Rock and any implications this may have for financial crisis management here. The paper examines these issues by reference to two key scenarios – a financial institution that is solvent but is experiencing liquidity problems and an institution that is insolvent or heading towards insolvency.
    This paper focuses on the domestic framework for managing financial stability issues. Work is on-going at EU level on enhancing the effectiveness of the EU stability framework by clarifying the existing arrangements for resolving cross-border financial crises and their use, while stressing the primacy of private sector solutions and minimising moral hazards. Arising from EU requirements there are a number of work streams that need to be addressed by our Domestic Standing Group on Financial Stability (DSG). These include developing a national contingency plan and carrying out a crisis simulation exercise. Ecofin Ministers recently adopted conclusions setting out further steps, at both EU and national levels, for the development of financial stability arrangements. The conclusions include common principles for cross-border financial crisis management and a roadmap for enhancing cooperation and preparedness and for reviewing the tools for crisis prevention, management and resolution. A new EU level MoU between supervisors, central banks and finance ministries will include a common analytical framework for the assessment of systemic implications of a potential crisis to ensure the use of common terminology in assessing the systemic implications of a cross-border financial crisis by relevant authorities and common practical guidelines for crisis management to reflect a common understanding of the steps and procedures that need to be taken in a cross-border crisis situation.
  2. Overall approach to crisis management — spectrum from constructive ambiguity to transparency
    At the outset it is important to draw attention to variety of approaches that can be taken by the authorities to financial stability planning and contingency planning arrangements for crisis management on a spectrum from constructive ambiguity to complete transparency. A policy of constructive ambiguity towards financial stability planning involves not sharing full information about public authorities’ likely actions in a financial crisis, in order to minimise moral hazard. In such circumstances a financial institutions cannot he sure in what circumstances the CBFSAI will intervene and so they are encouraged to monitor and manage risks that might otherwise be ignored if an institution was confident that the CI3FSAI would definitely intervene. Transparency regarding the preparations and preparedness of authorities for a financial crisis may help support public confidence in the event of a crisis but it may also constrain authorities’ actions in any given crisis due to
    expectations of their actions. It may also condition or influence pub1ic perceptions of the likelihood of a financial stability event.
    The authorities in Ireland have practiced constructive ambiguity regarding financial stability planning to date. For the future it would seem appropriate to maintain this approach. However, the existence and ongoing development of the EU framework for crisis management on a cross-border basis provides an opportunity to communicate, as appropriate, the existence of financial stability planning structures in Ireland in line with EU requirements in the interests of greater openness and transparency.
  3. Scenario I — An institution that is illiguid hut solvent
    If an institution is experiencing liquidity difficulties’ and has exhausted any opportunitieS for accessing liquidity in the wholesale maket the first step should be for it to seek liquidity from the European Central Bank (ECB) in normal operations. This liquidity would of course require eligible collateral. In Ireland, a large proportion of banks balance sheets can be used as collateral for liquidity provision; through for example the use of mortgage backed promissory notes. Intensive use of eligible assets for liquidity under “normal” Eurosystem conditions is likely to be noticed by the market. If this liquidity is not sufficient to restore liquidity to the institution, the institution may approach the CBFSAI for emergency liquidity assistance (ELA). The view of the CBFSAI is that the requirement for the ELA provision to an Irish bank would signify the existence of a serious threat to the long-term sustainability of the financial institution in question because of the ‘stigma’ that would attach to it. It is important to highlight, therefore, that ELA provision would be an interim measure while urgent consideration was given by all parties to the available options for rescuing the bank.
    31 CBFSAI role in this situation
    The authority responsible for the provision of ELA to an illiquid institution is the CBFSA1. The CBFSAI is preparing a paper outlining the basis, legal powers and other considerations relating to the provision of ELA and this will form an appendix to this paper when completed. On account of the CBFSAI’s statutory independence for monetary operations, on behalf of the ESCB, emergency lending would be at a national central bank’s own risk and the CBFSAI would therefore advise the Department before providing such assistance. This would take place through, for example, the DSG or other official channels. As the CBFSAI is a member of the ECB, provision of ELA must be reported to the ECB, either ex post, or in advance if it exceeds €500mn. The ECI3 could prohibit the ELA provision if it is deemed to interfere with the single monetary policy. It is very important to note that the CBFSAI is prohibited from providing ELA to an insolvent institution. Therefore if there is any concern that a financial institution seeking ELA is insolvent, the CBFSAI would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer. 1-lowever, it is recognised that this type of assessment is very difficult in a situation of financial stress. The issueS that arose in relation to the perfonnance of the Bank of England’s Lender of Last Resort function in the case of Northern Rock highlight a number of important issues requiring consideration in the context of the scope for ELA support. These are discussion at Section 3.6 of this paper below.
    For the purposes of this paper, illiquid/illiquidity is taken to be a situation where a financial institution is unable to convert its assets into negotiable instruments that can be used to meet its obligations. Also for the purposes of this paper, insolvent is taken to be a situation whereby an institution has insufficient assets to meet is obligations.
    While it is not necessary to make public immediately the provision of ELA, the support would appear on the CBFSAI’s balance sheet without referring to the recipient and could therefore prompt unhelpful market speculation, which could exacerbate the financial situation of the individual institution or the market generally. In addition, it seems unlikely that information that an Irish bank was in receipt of ELA would not come into the public domain in any event. The requirement for a PLC to make a disclosure to this effect under Stock Exchange rules also needs examination.
    3.2 Department/Minister’S role in this situatjtn
    Traditionally, it would be considered that the Minister for Finance does not have a specific role when an institution is illiquid but solvent and there is no legal role for the Minister in such an event. However, following the impact of the provision of ELA to Northern Rock in the UK on public confidence in that institution and the financial system generally (see below), it is likely that if the provision of ELA came into the public domain the Minister and the Department would in practical terms very quickly become involved in terms of the management of the potential broader financial stability issue.
    Therefore the Minister and Government could quickly find itself in a situation where there was pressure to give assurances that the State was prepared to support the bank in difficulty or provide guarantees to its depositors. Other guarantees which the Minister might consider giving include guarantee to banks regarding interbank lending to pre-empt overall withdrawal of market liquidity and guarantee to CBFSAI regarding losses that may occur on ELA. The broader issue of communication and maintaining confidence in the financial system raises the issue of whether the CBFSAI or the Minister / Government should take the lead communications on financial stability concerns. Consideration needs to be given to the requirement to communicate with the public but also with the international financial community whose assessment of overall financial stability conditions would be expected to be critical to the broader systemic impact of difficulties in any individual financial institution.
    The important question also arises in this context what options may be available to the authorities to initiate actions to address its emerging concerns about the bank’s liquidity, solvency or stability in advance of a crisis situation emerging into the public domain.
    3.3 Impact of ELA provision on confidence in the institution
    As the recent liquidity difficulties at Northern Rock have shown, while an institution may be illiquid but solvent, the public perception of a requirement for ELA is that the institution is in trouble and at risk of collapse. The announcement that Northern Rock would receive ELA from the Bank of England triggered a bank run which was only stemmed by the Chancellor’s announcement of a 100% guarantee for deposits in Northern Rock. It may be the case that the question of such a guarantee would now arise in any similar situation in Ireland in the future to prevent depositors withdrawing their money once any ELA provision is disclosed to the market.
    In circumstances that there may be specific concerns regarding the position of the financial system as a whole in Ireland, on account, for example, of its dependence on property related lending, a further effect of ELA provision on confidence in the financial sector may take place in international wholesale markets, as other banks lose confidence in an
    institution and are no longer willing to lend to it. ‘I’his could lead to a general decline in confidence in the Irish financial sector as a whole - depending on the reasons for the ELA provision in the first place — and has the potential to cause a systemic issue even if the initial institution is still solvent and the position of the Irish financial sector is in objective terms sound. As summarised above, in current market conditions, any difficulty in a significant individual Irish bank could be expected to raise very serious concerns regarding the stability of the Irish financial systeni overall. It is imperative therefore, that a successful resolution is secured at the earliest possible stage in the development of the crisis., and that, as much as possible any guarantee or interbank lending required would be in place in advance of any public knowledge of ELA provision.
    3.4 Importance of communication and media management strategy (Department and CBFSAI)
    The “Northern Rock effect” demonstrated that communications re any ELA provisions and the deposit protection scheme in place would be vital in the case of a crisis. Statements by the FSA, the Bank of England and the Chancellor that the bank was solvent did not prevent depositors losing confidence in Northern Rock and large queues forming as depositors queued to withdraw their deposits, worsening the liquidity position of Northern Rock even further. The evolution of the Northern Rock crisis in the UK and the information that has subsequently emerged regarding conflicts between the authorities on the resolution of crisis, highlight the case for a swift pre-emptive response to difficulties at the earliest possible stage. The longcr the crisis continues the greater the risk of contagion.
    A formal crisis communications procedure between the press offices of the three authorities should be established as part of the overall package of crisis management procedures to enhance the effective of public communications. A set of generic “Questions and Answers” documents and templates for media communication could be developed in advance to enhance any pre-emptive response.
    3.5 Actions undertaken by the UK authorities following Northern Rock’s difficulties
    Since Northern Rock difficulties began the UK authorities have taken a number of actions in order to maintain financial stability. These are:
    • The Bank of England provided ELA to Northern Rock and also announced that it would provide ELA at the same terms to any other institutions who ran into similar difficulties
    • Following the run on Northern Rock deposits the Chancellor announced that all current deposits in Northern Rock would be 100% guaranteed and it was clarified with the UK Treasury that the guarantee extended to Irish depositors and wholesale deposits.
    • The level of deposit protection was increased to 100% of the first €35,000 in any account
    • The Treasury guarantee was extended to all new deposits, including wholesale deposits, placed in Northern Rock
    • Northern Rock customers who withdrew from ISAs in Northern Rock were allowed to keep their tax benefits providing the money was redeposited in an ISA (in Northern Rock or another institution)
    • The guarantee was extended to a variety of exisiting and future unsubordinated wholesale obligations.
    Arising from this legal advice is required from the Office of the Attorney General on the legal scope available to the Minister to provide an increased level of guarantee if required particularly at short notice (over and above DGS levels).
    3.6 CBFSAI’s assessment of issues raised by Bank of England that impeded its lender of last resort function
    The CBFSAI is currently examining the four legal issues identified by the Bank of England as impeding its lender of last resort function. These are:
    • The Takeover Code
    This legislation forces takeover bids to he disclosed and sets out a long procedure for takeovers — the Governor of the Bank of England, Mr Mervyn King, said that this prevented him from organising a takeover and presenting it as a “done deal”
    • The Market Abuse Directive
    This defines what behaviour is considered insider dealing and provides for disclosures to the market — Mr King said this meant that any lending operations to Northern Rock had to be disclosed.
    • The insolvency regime in the Enterprise Act 2002
    This provides a framework for the winding up of companies – for banks it means that depositors have their accounts frozen. Mr King said that this made it rational for people to queue for their deposits back
    • The Financial Services Compensation Scheme
    This sets out the rules for the limited guarantees on UK banking deposits – Mr King said that the fact that this only covered up to £35,000 made it more important for people to withdraw their money from Northern Rock
    The Department may need to seek its own legal advice from the Office of the Attorney
    General in relation to these maters and any potential implications for the
    Minister/Department, to identify issues and possible options in resolving a financial crisis.
    4.Scenario 2: An institution that is insolvent (or approaching insolvency)
    If a period of illiquidity continues it is likely that an illiquidity institution will move closer to insolvency. As referred to above, it is important to note that, from the outset, any major financial institution drawing on ELA will be in very serious financial difficulty and is likely to be in need of rescue A situation that commences as one where an institution has difficulty in converting assets into financial instruments (cash, credit instruments) can deteriorate quickly (e.g. withdrawal of deposits by depositors, reluctance of lenders to provide credit facilities, etc.). In circumstances that liquidity is not freely available, any sustained poorly managed mismatch between the short-term liabilities and the longer-term asset can quickly lead to a situation whereby an institution becomes unable to meet its obligations as they fall due, i.e. it becomes insolvent because of its illiquidity. Furthermore a perception that an institution is in difficulty can lead to the discounting of the value of its assets by the market such that the value of its assets falls below its liabilities. Where lending to the financial institution in question is secured over its assets, any deterioration in asset quality will give rise to increased financial demands from its creditors.
    Given the importance of the principle of the precedence of private sector solutions, the first decision is whether the State should take any action to assist an institution at risk of insolvency. Responsibility for maintaining the solvency of an institution lies with its Directors and shareholders should try to ensure that any institution they invest in is solvent
    and will remain so for the foreseeable future in order to realise profits from their investment. The costs of insolvency should not transfer to the State simply because the institution in question is a bank (or other financial institution). The role of the authorities is to maintain financial stability and not to bailout shareholders of insolvent institutions. Thus the preferred outcome for an insolvent institution may be its failure and subsequent orderly wind-down. However, it may be the case that an institution is considered systemically important, ie the failure of this institution is believed to be likely to have a serious effect on the financial system in general and may thus cause financial instability. An institution of this nature is also described as “too big to fail” (TBTF). If a financial institution is considered TBTF, in order to maintain financial stability overall, it is likely that the State will intervene in order to prevent the failure of that institution. The intervention may take the form of assisting the institution until a private sector buyer can be found (as is happening with Northern Rock) or consideration could be given to taking the institution, or elements of it, into public ownership (See also Appendix 2)
    4.1 Definition of systemically important institution (TBTF)
    A TBTF financial institution is defined as one whose failure is believed to be likely— both directly through its impact on the real economy and indirectly through the risk that contagion effects will threaten the stability of other financial institutions — to provoke a systemic failure of the financial sector overall. Formally defining an institution as TBTF in advance of any difficulties is not a viable strategy for two main reasons:
    i) It would cause moral hazard as the institution expects that the State will intervene and it will be rescued if it should run into difficulties.
    ii) The systemic impact of the failure of an institution may vary depending on a number of factors, for example public confidence in the system in general or general financial market conditions. If public confidence is low, the failure of any institution could cause systemic problems and so in this case any institution may be TI3TF. Another reason an institution may be systemic important relates to the type of difficulties encountered by the institutions. If there is a perception that this type of difficulties (eg exposure to the property market) is likely to affect more than one institution this could also mean that its failure would have systemic consequences.
    The failure of even a small bank which is not systemically important in itself may not be acceptable in certain circumstances because of fear of contagion at a time of market uncertainty or for political deposit protection reasons. Thus the decision to classify an institution as TBTF, indicating that the State is likely to intervene, should be taken on a pragmatic, case-by-case basis in light of prevailing economic and financial circumstances. The information provided by the CBFSAI to the Minister and the Government, assessing the nature and scale of a financial crisis and the importance of the institution in the financial system is of criticai importance when designating a financial institution as TBTF. It also needs to be borne in mind that a further lesson from the Northern Rock situation is that the state of public confidence may be such that what, in objective terms, may not be a systemically important financial institution (i.e. one that is TBTF) may need to be treated as one on account of the potential impact of its collapse on public confidence in other financial institutions and the financial sector generally.
    4.2 Role of CBFSAI if an institution is insolvent
    It is important to note that the CBFSAI is legally prohibited from providing ELA to an insolvent institution. As referred to above, it will be difficult particularly in a crisis situation to differentiate clearly between an illiquid and an institution at risk of insolvency. In any event an illiquid institution can quickly become insolvent. It is therefore essential that
    there is close co-operation, coordinatiOfl and communication between the three inStjtUtlOflS comprising the DSG to ensure that the tools available to manage a crisis situation are effectively deployed in a crisis situation.
    The CBFSAI could continue to lend to an insolvent jnstjtutjon if it was given a guarantee or letter of comfort from the Minister / Government. The role of the CBFSAI in lending to an insolvent institutiOn is thus defined by the actions of the Minister for Finance. There are, however, significant issues regarding the Minister’s legal powers in this area (see below).
    It is also important to note that under Company Law it is the responsibility of the Board to determine whether an institution is in a position to meet its obligations as they arise or not. While the CBFSAI, in discharging us role as lender of last resort, would clearly be involved in intensive monitoring of the financial status of the bank to which it was lending, a decision that the bank had become insolvent and ongoing support required State involvement would take place at the point that the bank was being placed in adminiStrati0L This highlights the case that early action is required to respond to a situation of financial distress in a bank with a VieW to achieving a market-based resolution.
    4.3 Role/Legal powers of the Minister in this situation
    As outlined above, if an insolvent bank sought ELA, the CBFSAI would be legally prohibited from extending it. However, if the bank was systemically important and the Government agreed to extend a guarantee to it liabilities, then this would turn it from an insolvent bank into an illiquid but solvent one (with the State guarantee backing up its capital), so that the CBFSAI could inject liquidity to prevent contagion effects in the wider financial system.
    In regard to guarantees, Public Financial Procedures (PFPs) provide that a guarantee may be issued only where there is specific statutory authority to issue such a guarantee. Statutory power to guarantee borrowing is provided under the State Guarantees Act, 1954 (which allows the Minister for Finance to guarantee borrowing by any body named in the Schedule to the Act or added to the Schedule by Government order) or under the specific legislation governing a particular body.
    The statutory power to guarantee whether under the State Guarantees Act, 1954 or other legislation is normally subject to a cash limit above which guarantees cannot be given in respect of a particular body. The use of the State Guarantees Act for guaranteeing borrowing has diminished and the practice now more usually adopted is to provide borrowing and guaranteeing powers in the particular legislation which relates to a specific State body.
    “Letters of Comfort” is a somewhat loose term used to describe a form of written assurance to lending institutions or others in relation to borrowing or other financial commitments where there is no statutory power to guarantee or where guarantees up to the statutorily authorised level have already been given. PFPs state that such letters are objectionable as they may be interpreted as imposing a contingent liability on the Exchequer without Dáil approval. Detailed instructions in relation to letters of comfort have been set out in Department of Finance Circular 4/84. The main principle contained in these instructions is that a letter which expressly or by implication gives a guarantee or undertaking not already authorised by legislation should not, in any circumstances, be issued. The CBFSAI’s view is that a letter of comfort from the Minister to cover the CBFSAI’S risks
    would not be sufficient for the CBFSAI to lend to an insolvent inStitutiOnS — a comprehensive guarantee would be necessary.
    The discussion above would seem to suggest that in order for the Minister to provide the CBFSAI with the guarantee it requires to assist an insolvent institution legislation is required. However, if this legislation is passed in advance the advantages of constructive ambiguity may be lost as it will be clear that the State may “bailout” an insolvent institution. Legislation may also require that the circumstance in which such a letter of comfort be provided arc laid out which could cause moral hazard, as institutiOflS would know when and how the State would intervene if they were in difficulty. The existence of such powers in the Statute Book could also compel the Minister to act to save an institution that would otherwise not be saved and reduce the flexibility available to the Minister to deal with any particular institution. It may be the case therefore that the solution is to prepare legislation cx ante of a crisis but only enact it if required. The difficulty this raised is that the time frame for dealing with a crisis may be quite limited and the Dáil may not be in session when the legislation was required.
    In line with what has taken place in other jurisdictionS the existence of explicit legal powers may not be required providing the Minister / Government is in a pàsition to announce the intention to provide the required guarantee / support with the appropriate approval of the Oireachtas in due course either in relation to legislation or through approval for a Vote. The CBFSAI’s view is that it would not be able to act on a “promise of a guarantee” given the prohibition on their lending to insolvent institutiOflS.
    If the State is to intervene to support an institution it may choose to assist the institution to remain a going concern while a buyer is found, which would require liquidity assistance and the guarantee outlined above. However, another option which may be available to the State is to nationalise the institutiOn. In these circumstances, the State may simply takeover the entire institution or takeover the part of the institution that is in difficulty (creating in effect a “bad bank”). The nationalisation of a bank would be likely to be a tempOrarY measure. If the entire institution was nationalised, it might be then be sold on, after it had recovered from its difficulties. If a “bad bank” was formed then this bad bank might be run off or put in examinership. Any form of nationalisatiofl may require legislation. A number of important legal / constitutional points are likely to arise ViS-à-ViS shareholders’ rights under Company Law in respect of which legal advice is required.
    4.4 PrincipleS guiding public intervention
    A paper prepared by the Department of Finance in 2005 identified the following as
    important principles which should guide State intervention to resolve a banking crisis:
    The support given is transparent and public
    • The attractiveness and public funding needs of the programme shall be minimised. The economic responsibility of the owners of the bank receiving support should be realised as widely as possible - shareholders should not be protected against losses.
    • The terms of the programme should support the efficiency of the banking system and contribute to necessary structural adjustment.
    • The State should be afforded the opportunity to participate in any upturn in the fortunes of the rescued entity
    • The State should seek value for money
    • The State’s contribution to the rescue should be remunerated on commercial tenns at least
    • State support should be conditional - opportunities for exerting leverage from the support should be fully exploited.
    • The rescue plan must have a good prospect of success and have a high probability of returning to the State any funds provided over the longer term
    • Prompt intervention should reduce the cost of intervention and will promote efficiency
    • Thc impact of shareholder interests should be assessed.
    There will of course be an inevitable tension between these desiderata and the risk (because of the delay associated) of failure to avert the crisis.
    An Ad Hoc Working Group on Financial Stability (ADWG) was established in September 2006 by the ECOFJN Council to explore ways to further develop financial stability arrangements in the EU The Final Report was presented to the ECOFIN Council. The core of their Final Report, which formed part of the Ecofin Council conclusion in October 2007, is a set of 13 policy recommendations, 9 principles and a detailed strategic roadmap for actions out to 2009 involving action mainly in two areas — extending the 2005 EU Memorandum of Understanding on cooperation in financial crisis situations and developing voluntary cross-border cooperation agreements. The principles, which are to be applied to cross-border financial crises, are listed below:
    Comm on Priii ciples for cross-border financial crisis management
    I - The objective of crisis management is to protect the stability of the financial system in all countries involved and in the EU as a whole and to minimise potential harmful economic impacts at the lowest overall collective cost. The objective is not to prevent bank failures.
  4. In a crisis situation, primacy will always be given to private sector solutions which as far as possible will build on the financial situation of a banking group as a whole. The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses.
  5. The use of public money to resolve a crisis can never be taken for granted and will only be considered to remedy a serious disturbance in the economy and when overall social benefits are assessed to exceed the cost of recapitalisation at public expense. The circumstances and the timing of a possible public intervention can not be set in advance. Strict and uniform conditions shall be applied to any use of public money.
  6. Managing a cross-border crisis is a matter of common interest for all Member States affected. Where a bank group has significant cross-border activities in different Member States, authorities in these countries will carefully cooperate and prepare in normal times as much as possible for sharing a potential fiscal burden. If public resources are involved, direct budgetary net costs are shared among affected Member States on the basis of equitable and balanced criteria, which take into account the economic impact of the crisis in the countries affected and the framework of home and host countries’ supervisory powers.
  7. ArrangementS and tools for cross-border crisis management will be designed flexibly to allow for adapting to the specific features of a crisis, individual institutions, balance sheet items and markets. Cross-border arrangements will build on effective national arrangements and cooperation between authorities of different countries. Competent authorities in the Member States affected by a crisis should be in a position to promptly
    assess the systemic nature of the crisis and its cross-border implications based on common terminology and a common analytical framework.
  8. Arrangements for crisis management and crisis resolution will be consistent with the arrangements for supervision and crisis prevention. This consistency particularly refers to the division of responsibilities between authorities and the coordinating role of home country supervisory authorities.
  9. Full participation in management and resolution of a crisis will be ensured at an early stage for those Member States that may be affected through individual institutions or infrastructures, taking into account that quick actions may be needed to solve the crisiS.
  10. Policy actions in the context of crisis management will preserve a level playing field. Especially, any public intervention must comply with EU competition and state-aid rules.
  11. The global dimension will he taken into account in financial stability arrangements whenever necessary. Authorities from third countries will be involved where appropriate.
    ‘While these type of guiding principles should clearly inform the decision making made in a crisis situation, it needs to be borne in mind that every crisis situation is different and that a rigid adherence to any one principle is unlikely to be consistent with effective and successful crisis management.
    4.5 Company Law provisions and the interaction of these provisions and financial stability objectives — difficulties, etc
    While it may be desirable to consider a special insolvency regime for dealing with banks this paper simply presents the three courses of action currently available under company law should an institution be insolvent or nearing insolvency.
    The Department produced a summary of these provisions which is attached at Appendix I. These three mechanisms are summarised below. The Court Protection route seems to offer the most advantageous approach to dealing with a problem financial institution, if intervention at this level is to be considered.
    Appointment of a receiver for all or part of the assets
    Receivers are usually appointed by creditors in respect of a charged asset once the conditions (default etc.) specified in the agreement creating the charge for the appointment occur. The receiver’s main function is to realise the security for the benefit of the creditor. Appointment of a receiver to a financial institution would immediately erode confidence in its solvency, require supervisory intervention and probably precipitate a request for appointment of either liquidator or examiner.
    Appointment of a liquidator (under three forms of winding up,);
    There are three form of winding up:
    • The members (voluntary winding up of a solvent company)
    • The creditors (voluntary winding up of an insolvent company)
    • The Courts (compulsory winding up for insolvency or other reasons).
    The functions of a liquidator are to wind up the affairs of the company and realise its assets for distribution. The appointment generally puts an end to the directors powers
    The CBFSAI may petition for the winding up of a bank on four grounds:
    • that it may be unable to meet its obligations to creditors
    • has failed to comply with a direction under S21 of the Central Bank Act (CRA)
    • has ceased to carry on banking
    • in the interests of depositors.
    Liquidation has a number of practical effects:
    • It freezes the assets and the transactionS of the company
    • It freezes all actions against the company;
    • It terminates all contracts of employment;
    • Payments to creditors etc. would generally not commence until the liquidator has established the true state of affairs of the company
    The appointment of a liquidator is primarily intended to provide for an orderly winding up of a firm’s affairs. However this would have serious implications for customers and other users of financial institutions, which are not contemplated in the nonnal framework for dealing with liquidation. There could be delay or uncertainty in relation to repayment of short term commercial deposits and settlement of other payment transactions. This would have knock on effects on liquidity for both in the payments system and commercial transactions (e.g. ,money held by solicitors and others towards the conclusion of contracts). Given the importance of confidence in the financial services sector, the appointment of a liquidator (or receiver) to one financial institution, would likely lead to financial stability concerns arising in the wider system.
    Appointment of an Examiner (Court Protection.)
    The protection and examination procedure is designed to save all or part of the undertaking and to prevent it being wound up. Only the CBFSAI may apply to the Courts for examinership in the case of a credit institution which is supervised by it. Creditors’ rights are restricted from the moment the petition is presented. An application to the Court should demonstrate that the company is insolvent or likely to become so (5 tests are provided) and satisfy the Court that there is a reasonable prospect of ensuring the survival of all or part of the undertaking. The immediate effect of court protection is to provide the company with extensive protection against creditors, claims, realization or repossession of assets against which security was given, liquidation and receivership, from the time of application. While this would freeze the company’s transactions, the examiner can be given extensive powers to continue its operations pending the putting in place of the final rescue package. Examinership would mean the closure of the entity until a new owner or other solution is found. This could have serious implications for the overall payment system if the banic is amajor clearing bank. To realise the benefits of examinership a guarantee of deposits may be required.
    Where necessary, in order to secure the survival of the company, the examiner may certify liability in respect of certain transactions, thus making them an expense of the examination which would then have priority over other debts of the company. There also may be scope for using the Deposit Guarantee Scheme (DOS) to pay out deposits. It may be possible to maintain some essential banking services during examinership.
    Critical Banking Functions
    The failure of any bank could have negative impacts on critical banking services such as automated payments and direct debits that are now an integral part of payments systems on which the economy is reliant. It may be possible for certain critical functions to be taken on by another provider but this approach would of necessity be uncertain and ad hoc in nature. Mechanisms to maintain critical banking functions would be important from the point of view of protecting consumers and helping to maintain market and consumer confidence.
    The recent UK discussion paper ‘Banking reform protecting depositors — indicates there different approaches to resolving bank difficulties in other countries. The US has a distinct insolvency regime for banks involving wide powers for special administrators appointed to
    carry out resolutions. These special administrators are generally answerable to the banking regulator rather than the courts. Bridge Banks involves either the transfer of the assets and liabilities of the existing legal entity to a new legal entity or the transfer of the existing legal entity to new openers. The new (bridge) bank would then continue to provide the critical banking functions while either a recapitalisation or a permanent transfer of business to new owners was organised. Some European countries have special arrangements for banks in trouble including provisions for authorities to appoint special or provisional administrators with discretion over the initiation of measures, including the ability to apply them to banks before they arc technically insolvent.
    In looking to the case for the reform of deposit protection and banking stability systems in
    Ireland, recent developments in the UK and the subsequent assessment of how the Northern
    Rock situation might have been better handled, highlight a number of issues for review and
    examination as follows:
    • Does Ireland need a new insolvency mechaiiism specifically for banks and other credit institutions?
    • If it is decided to maintain the legal mechanisms currently available under Company Law are there any reforms that would be desirable?
    • Is it clear that examinership is the best available winding down mechanism if the aim of the State is to “rescue” the hank?
    • What mechanisms are available to ensure that essential banking services in circumstances that a retail financial institution is the subject of examinerhip or administration.
    4.6 Implications of State Aid rules for any actions undertaken to assist an insolvent institution
    The EU framework for competition is laid down in Articles 81-89 of the EC Treaty. Article 87(1) declares that “any aid granted by a Member State through State resources in any form whatsoever which distorts or threatens competition… .shall. . .be incompatible with the common market” The EU Commission is responsible for decisions on this issue and must be notified by a Member State of any State aid measures. The Commission’s assessment of whether an action is state aid is based on the ‘private investor test’ — a State measure is State aid if a private investor would not be willing to provide the aid under similar circumstances. Article 87(1) does apply to the banking sector. However, liquidity support for solvent institutions is not considered State Aid.
    Article 87(3)(b) provides for a possible derogation for actions taken to “remedy a serious disturbance in the economy of a member state.” Thus if measures to deal with a systemic crisis support the whole national financial system and do not duly distort competition and are limited to what is strictly necessary then these measures could be declare compatible with EU competition law. However the Commission takes the view that a crisis at a large bank does not automatically entail derogation.
    The conclusions of the Economic and Financial Affairs Council (ECOFII’4) meeting 9 October 2007 invites the Commission to “endeavour to clarify when a major banking crisis could be considered by the Commission such as to provoke a ‘serious disturbance of the economy’ within the meaning of Article 87(3)(b) of the EC Treaty and state aid rules” and “to consider streamlining procedures focusing on how state aid enquires under such critical circumstances can be treated rapidly.” The outcome of the Commission’s work could have a major impact on the scope for Member States to take action to avert systemic crises.
    State Aid and Northern Rock
    The European Commission is monitoring the situation regarding the provision of a State guarantee of Northern Rock deposits by the British government- In September a Commission spokesperson said it was too early to tell whether it has State aid implications. The spokesperson also said that the Commission is generally supportive of rescue efforts when there is a systemic risk of collapse and this type of support has a six-month limit and has to be granted on normal market terms so as not to distort competition with other financial institutions. If it lasts over six months, any official aid could not be considered as rescue support and would require a restructuring to be carried out.
    On 25 October the UK Chancellor of the Exchequer told MPs that the European Commission had raised no objections to the facility provided to Northern Rock. That suggests it is not being treated as State aid under European rules.
    The EU treatment of UK support for Northern Rock will be monitored closely to draw any lessons relating to the possible implications in the area of State aid for the provision of a government guarantee to the CI3FSAI to support a financial institution in difficulty, to understand fully the extent to which the terms of any such guarantee are prescribed by the State aid rules and to assess the implications of any positions taken by the European Commission on the UK Government’s guarantee of all Northern Rock deposits for any future measures undertaken in order to prevent a systemic crisis.
    4.7 Deposit Guarantee Scheme:
    The UK public’s reaction to the liquidity difficulties at Northern Rock and the UK Chancellor’s provision of a 100% guarantee of all deposits in Northern Rock, which has subsequently been extended to include new deposits, has led to calls for a reassessment of the effectiveness of the deposit guarantee arrangements in the EU as a whole under the terms of the EU Deposit Protection Directive. The Ecofm Council, at its meeting on 9 October last, decided on a preliminary set of issues to be analysed and addressed following the recent market turbulence. These include reviewing possible enhancements of the deposit guarantee schemes in the EU. This review is to be undertaken by the Commission and the EU’s Financial Services Committee on which Ireland is represented. This review is to report by mid-2008. The work carried out on this review and its conclusions will be important inputs to the process of ensuring that arrangements to safeguard financial stability in Ireland continue to conform to international standards.
    The legislation governing the Deposit Guarantee Scheme (DOS) in Ireland is the Deposit Guarantee Directive Regulations which caine into force in 1995. Ireland provided the minimum level of protection - €20,000 or 90% of the loss, whichever is the lesser. This is significantly less than the 100% of deposits up to £35,000 now provided in the UK. The UK Chancellor has also stated that he plans to increase this protection to £100,000. However, the UK banking industry has already voiced significant opposition to an increase in deposit protection to this level on account of the funding implications.
    An issue arises as to how a payout of the scheme would be funded. Currently the DGS stands at €455 million. However it is likely that the requirement to compensate depositors would be greater than this figure. There is a requirement in the Deposit Guarantee Directive Regulations on the CBFSAI to pay all eligible depositors. The CBFSAI have therefore concluded that it is implied that if the I)GS is not sufficient to meet the loss amount the CBFSAI must meet the balance. The Regulations allow the CBFSAI to go back out to credit institutions and seek additional contrihutions It is considered though that these contributions are limited to the initial amount in the fund. It is unclear whether, if more than
    twice the current value of the fund was required, the CBFSAI could or should cover the balance. The question also arises of the pace at which participating credit inStitUtiOnS would be in a position to replenish the DGS fund and the implications for maintaining the attractiveness of Ireland as an investment location for banks, since they can provide services from abroad on a broad basis
    The speed at which deposits can be repaid may be extremely important in maintaining consumer confidence in an institution and may be something that should be examined in the review.
    The two possible uses of the DGS identified are:
    • to assist illiquid and/or insolvent institutions ic could the deposit protection scheme be used to financially assist a (systemically important) institution?
    • to service depositors during an examinership — as discussed above examinership may be the best insolvency proceedings option in the case of an insolvent bank However, as all assets including deposits would be frozen, could the DGS be used to allow depositors to access (some of) their deposits during the exaininership?
    The Directive does not seem to explicitly prohibit a fund from having additional responsibilities, so long as it offers that minimum level of protection. However, such an option would have to be considered in the light of State aid rules if its was to be introduced now and would require primary legislation, if it was found feasible to define a purpose that did not conflict with State Aid rules. This issue will of course require further detailed examination.
    In developing Ireland’s position and contributing to the EU review, it will be necessary to examine what is the appropriate level of deposit protection in Ireland balancing ‘moral hazard’ and the requirement to maintain confidence in the stability of the financial system; the implications in the case of future financial stability events of the 100% guarantee of deposits in Northern Rock given by the UK Chancellor in order to restore confidence in an institution (or to prevent a ‘bank run’); as well as the manner in which deposits are repaid, and particularly the speed at which customers receive their compensation. Consideration is also required of the scope for the DGS to be used to maintain financial stability in ways other than simply repaying deposits in an insolvent institution.
  12. Scenario 3: Unclear whether institution is illiquid or insolvent
    This paper details two scenarios: (a) bank is illiquid but solvent (section 3), and (b) bank is unequivocally insolvent or unequivocally approaching insolvency (section 4). In periods of nonnal financial tranquillity, it may be fairly easy to distinguish between these two cases. A third case in which it is uncertain as to whether the bank is merely illiquid or is indeed insolvent may constitute a more realistic scenario. Banks are increasingly involved in financial markets activities either directly through proprietary dealing in financial markets, lending for the purpose of asset purchase by their borrowing clients or through off-balance sheet guarantees and underwriting for financial market participants. In a period of severe financial markets turmoil, it may be very difficult to determine the true worth of the bank’s assets including its net contingent assets. A fortiori, it is much more difficult for a central bank or a financial regulator to know whether the bank is just illiquid or has become insolvent, especially in the light of the incentives a bank may have to disguise its true state of health from a central bank or financial regulator.
    Given this uncertainty, the central bank may end up making one of the following two judgment calls. Firstly, it may lend to an institution which turns out to be insolvent. This is prohibited according to the general terms and conditions relating in the Documentation on Monetary Policy Instruments and Procedures (CBFSAI, 2005), which says that counterparties must be financially sound However, the definition of soundness (i.e., subject to at least one fonn of EU/EEA harmonised supervision) is not especially precise or helpful. In any case, the risk associated with this judgment call may not be in any way damaging to the Banic since, in the case of bankruptcy of the counterparty, the Bank can always sell off the collateral. But the loss to the Bank is not the only consideration. An insolvent bank which succeeds in borrowing from the Bank will almost certainly be tempted to “gamble for resurrection” which could exacerbate the prevailing financial market turmoil and damage the banking system’s financial reputation.
    The second potential risk consists of refusing to lend to a bank because it wrongly considers it to be insolvent when in reality it is merely illiquid. This is potentially much more serious. The refusal to lend may drive a sound bank into liquidation. This presumes that it cannot get liquidity in the private secondary money market (as many banks are currently finding it hard to do). If it is then unable to meet its obligations to its creditors then one or other of them could petition, successfully, for the winding up of the bank. So a bank could become insolvent under private company law when it is easily solvent under the total liabilities / total assets definition of insolvency relevant to the CBFSAI and IFSRA
    Urgent Next Steps
    • Seek legal advice from the Office of the Attorney General as a matter of urgency on the legal issues highlighted in this paper.
    • Identify and discuss with the CBFSAI key issues that arise in dealing with the emergence of financial difficulties in a systemically significant Irish financial institution.
    • Complete preparations for and participate in the DSG’s crisis management simulation exercise.
    • Prepare crisis management manual for the Department in line with EU requirements.
    • Review any specific issues arising to ensure that there is clarity as between the roles and responsibilities of all participants in the national DSG structure including in relation to communication.

Document 37 - part 2

Appendix 1
Company Law intervention Mechanisms
I Company Law provides for three forms of external intervention in the running/affairs of an insolvent (or potentially insolvent) company. In ascending order of relevance to a financial institution these are:
• Appointment of a receiver for all or part of the assets;
• Appointment of a liquidator (under three forms of winding up);
• Appointment of an Examiner (Court Protection).
There are also various provisions for appointment of inspectors etc. but in the case of a financial institution, such an appointment would either follow or precipitate the intervention options above. Anyhow, the supervisory powers of the CBFSAI would probably be more relevant and confidential. Company and Banking Law also provide mechanisms for internal reorganisation, transfers of business and mergers, but these are either cumbersome or involve significant time lags. The Court Protection route seems to offer the most advantageous approach to dealing with a problem financial institution, f intervention at this level is to be considered.
Appointment of a receiver
2 Receivers are usually appointed by creditors in respect of a charged asset once the conditions (default etc.) specified in the agreement creating the charge for the appointment occur. The receiver’s main function is to realise the security for the benefit of the creditor. Such appointments do not need court sanction although the courts also have an implicit power to appoint a receiver e.g. where the security is put in jeopardy or there is a winding up. Where the security relates to all of the assets of the company the receivers powers can extend to the running of the company and the salvage of its viable parts. Appointment of a receiver to a financial institution would immediately erode confidence in its solvency, require supervisory intervention and probably precipitate a request for appointment of either a liquidator or examiner. The CBFSAI does not seem to have explicit powers to appoint a receiver to a credit institution, but receivership per se would not seem to offer any benefits as a form of supervisory intervention. However, some of the powers enjoyed by a receiver might be looked at in the context of any proposal to extend the Bank’s supervisory powers to intervene in the direction of a financial institution.
Appointment of a liquidator
3 A liquidator may be appointed for the winding up of a company by
• The members (voluntary winding up of a solvent company)
• The creditors (voluntary winding up of an insolvent company)
• The Courts (compulsory winding up for insolvency or other reasons).
The functions of a liquidator are to wind up the affairs of the company and realise its assets for distribution (S258 Companies Act (CA) 1963). The appointment generally puts an end to the directors’ powers (completely so in the case of a Court appointment). The liquidator has considerable powers over the company’s assets etc., but many, particularly in relation to settlement with creditors, must be exercised under supervision of the Company’s members, creditors or the Court as appropriate. The winding up commences from the time the resolution is passed or the petition is presented to the court. All three forms of winding up are well publicised to creditors, public and authorities.
Members and creditors voluntary winding up
4 The members (shareholders) may by special resolution appoint a liquidator to wind up a company (S251 CA 1963). In the case of a solvent company the only further formalities
arc a statement of solvency by the directors (independently verified), notification of the Registrar of Companies and a public notice. If the company is insolvent, an ordinary resolution is all that is required but there must be a publicly advertised creditors meeting on the day the resolution is proposed to be voted or the following day. The creditors are entitled to appoint the liquidator and a committee of inspection to fix his remuneration and oversee the winding up. Neither course precludes application to the Court either on specific points of the liquidation or for a compulsory winding up Ss 49 and 50 Of the Central Bank Act (CBA) 1989 provide that the CBFSAI is entitled to receive any documents etc. which are required to be sent to creditors and to be represented on any committee of inspection in any winding up of a license holder (i.e. bank) or former license holder. S 109 of the Building Societies Act (I3SA) 1989 applies the company law and CBFSAI provisions to liquidation of Building Societies.
Compulsory winding up under a Court appointed liquidator
5 The company, any creditor, the M/ETE (following an inspection report) and any member or contributory (a person liable to contribute to the assets in the event of its being wound up) may petition the Court for the winding up of a company (S215 CA 1983). The grounds on which the Court may order a winding up sets out in S213 CA 163 but the most common reason is inability to pay its debts (e.g. Revenue cases). This status is deemed to exist if a judgment order is returned unsatisfied or if a creditor owed more than £1000 is unable to secure payment, security or compounding of the debt within 3 weeks (S 214 CA 1963).
6 The CI3FSAI is entitled to prior notice and a hearing in relation to any petition to wind up a bank The Bank may also petition for the winding up of a bank on four grounds i.e. that it may be unable to meet its obligations to creditors, has failed to comply with a direction under S21 of the CBA 1971, has ceased to carry on banking, or in the interests of depositors. Wbere a bank is being wound up voluntarily the Bank may also apply on these grounds to have it wound up by the Court (S48 CBA 1989). The Bank has similar powers in relation to Building Societies (S 1 09 BSA 1989).
7 The court has wide powers in relation to the appointment of a liquidator and may terminate or vary the appointment and appoint a provisional liquidator (to secure the assets pending liquidation). The official liquidator is an officer of the Court and has extensive powers (subject to Court control). Usually the Court directs him to call a creditors meeting and to set a timetable for various phases of the winding up process. The appointment does not prevent the appointment of a receiver in respect of charged assets but it restricts the receiver’s powers to manage the business or enter into contracts binding the company
8 From a practical point of view a liquidation has a number of important effects:
• It freezes the assets and the transactions of the company;
It freezes all actions against the company;
• It terminates all contracts of employment;
• It invokes the fraudulent preference rule in relation to certain payments, floating
charges and other securities and transactions effected in the previous 6 months.
• Payments to creditors etc. would generally not commence until the liquidator has
established the true state of affairs of the company
9 In the case of a financial institution these practical difficulties would have important implications. There could be delay or uncertainty in relation to repayment of short term commercial deposits and settlement of other payment transactions. The liquidity of the institution would also he affected by the triggering of cross-default clauses in long term debt instruments which would render them immediately repayable, while it would be unable to raise
firnds on any commercial basis, thus increasing the level of uncertainty for creditors. This would have knock on effects on liquidity both in the payments system and for commercial transactions (e.g. money held by solicitors and others towards the conclusion of contracts). The value and nature of assets (loans, securities derivatives etc.) and liabilities (e.g. debt instruments) could both be difficult to determine and adversely affected by the appointment of the liquidator. Termination of employment contracts could affect the availability of useful personnel to the liquidator (particularly in the areas of dealing with depositors and collection of assets/loan repayments from creditors).
10 While these adverse implications could be minirnised by delaying liquidation until there had been an orderly run down of the business (deposit and lending bases) and/or its reliance on short term deposits, significant funding might have to be provided to replace the volatile commercial deposits. In those circumstances any transfer of property (or security given) in respect of that funding could be rendered void if this took place within the previous six months and the company was insolvent (i.e. unable to meet its liabilities as they arose) at the time (S286 CA 1963). The CBFSAI, as funder would then become an unsecured creditor, whose dividend would depend on the outcome of the winding up. Any decision to provide financial support (other than temporary liquidity to an otherwise very sound institution) would have to have regard to the likely outcome of a liquidation. In the case of an institution with a strong retail deposit base would an intervention which effectively met 100 per cent of the liabilities of commercial depositors before liquidation either prejudice the use of the deposit protection scheme to meet the liabilities to small depositors, or give them grounds to claim unfair treatment?
Appointment of an Examiner (court protection)
11 The protection and examination procedure is designed to save all or part of the undertaking and to prevent it being wound up. The Company, its directors, shareholders or creditors may apply to the Court to have an examiner appointed to the Company. However, only the CBFSAI may apply in the case of a credit institution which is supervised by it (this seems to exclude Building Societies). Creditors’ rights are restricted from the moment the petition is presented. An application to the Court should:
• be in good faith and factually accurate;
• be supported by good reasons why the examiner should be appointed;
• be supported by a report of an independent accountant (although in exceptional cases the court may postpone this for up to 10 days);
• demonstrate that the company is insolvent or likely to become so (5 tests are provided);
• satisfy the Court that there is a reasonable prospect of ensuring the survival of all or part of the undertalcing.
The CBFSAI do not consider that their supervisoly data would be detailed enough/suitable to establish viability or to support the independent accountant report to support its application as it would not reflect the difficulties the institution is experiencing,
12 The immediate effect of court protection is to provide the company with extensive protection against creditors, claims, realization or repossession of assets against which security was given, liquidation and receivership, from the time of application Shareholders and directors may continue to exercise their rights and functions but the Court may give directions in relation to the conduct of the company’s business, including restriction of the directors’ powers. The granting of protection and the appointment of the examiner must be notified to the Companies Office and the creditors etc. and advertised within specified time limits.
13 The examiner has 2 principal functions:
• To examine the affairs of the company and to report back to the court (within 3 weeks of his appointment), and
• To seek to put together a scheme to ensure the company’s survival to report back to the Court (within 6 weeks of his appointment).
The Court may extend the above time limits. Also the Court must he immediately informed of any irregularities in the company’s affairs found by the examiner. If the conclusions of the initial report are adverse the Court may make such orders as it sees fit including a winding up order. If the conclusions are that all or part of the company can survive, that a scheme would facilitate this, and that to do so would be more advantageous than a winding up, the examiner prepares his proposed scheme for the survival of the company and presents it to the Court, and then to the various classes of creditors etc. Once the latter have agreed to the scheme the Court confirms it and it may be implemented.
14 In the case of a credit institution Court protection would offer a number of advantages. While it would freeze the company’s transactions, the examiner can be given extensive powers to continue its operations pending the putting in place of the final rescue package. Where necessary, in order to secure the survival of the company, the examiner may certify liability in respect of certain transactions, thus making them an expense of the examination which would then have priority over other debts of the company. These powers could presumably be granted immediately if the Bank’s application were able to demonstrate the ultimate viability of the business, the availability of appropriate funding and measures to reduce or control the risks of prejudicing the position of other classes of creditor. Holders of subordinated debt instruments or long term deposits would remain restricted in relation to demanding immediate repayment e.g. under cross default clauses in their agreements. This could allow the repayment of deposits and the settlement of payments as they fall when due, thus minimising the short term liquidity problems associated with a liquidation.
Appointment of Inspectors or intervention of the Director of Corporate Enforcement
15 The Companies Acts provide for various powers of direct or Court ordered investigations into the affairs of a company. However, their scope is confined to investigation of breaches of Company Law. Obviously, an inspection of this nature could not be ruled out if breaches of Company Law came to light during other interventions to rescue a financial institution. An early intervention of this nature would have the effect of damaging confidence in the institution and offers less scope for dealing with its banking business than a direction by the Banic (under S 21 CBA 1971). Interventions of this nature would not help directly in a rescue or salvage of a credit institution, although it may be a necessary accompaniment if public funds were being committed.
Structural Changes to the Company
16 The vast majority of structural changes to a company (e.g. reduction or issue of share capital, mergers, change of purpose and often sale of major assets require as a minimum the prior approval of the shareholders by special resolution. In the case of a credit institution which is a publicly quoted company the time scale for effecting such a change, and the need to obtain it to shareholder approval on both sides (or legislative authority in the case of the State), would to limit the scope for use of such mechanisms to restore confidence in its solvency, or to effect
urgent changes in its operations. Similarly, these requirements would seem to preclude an arrangement with whereby rescue funding would be provided (by the State or another company) in exchange for share capital.
17 The situation in the case of an unquoted or subsidiary company would be slightly better. The directors or owners could presumably take some remedial actions before the need for them became public. In some circumstances this might require a direction from the CBFSAI. In thc case of subsidiary company, sale to a third party could also be agreed if it were within the powers of both sides (i.e. directors of the companies involved) or in the expectation of subsequent shareholder sanction. This course would not be without risk to the survival/reputation of the parent company, particularly if a clean break were not possible or a liquidation by the new owners followed immediately. It would still be dependent on a clear plan for dealing with the problems of the affected institution, and a contingency plan to support the parent if it were a financial institution
18 The course outlined at par 17 was followed when the State acquired the insolvent ICI from AIB in 1985 and put it into administration under the Insurance Acts, with funding effectively provided by A113 and the banking system under parallel and subsequent agreements. (Shareholder and legislative cover was given retrospectively.) Similarly, the State acquired a share holding in Irish Life in 1939 by facilitating the merger of a number of insolvent life companies and making up the deficit on policyholders funds (The Insurance Act 1939 provided for the Minister’s holding and confirmed the arrangement) However, the relevance of these models to a credit institution is limited. Insurance liabilities are generally long term while most credit institutions are heavily dependent on short term deposits. Also, unlike non-repayment of deposits, delays in or partial settlement of insurance claims would have little or no systematic effects on payment systems or liquidity in the banking system.
Stock Exchange considerations
19 In the case of a listed institution, the Stock Exchange would have to be informed, by the affected company, of any development which would have a material impact on its share price. This greatly complicates any effort to rescue the institution from its difficulties. Any solvency or structural liquidity problems affecting the credit rating or borrowing terms of a credit institution would presumably have implications for the share price of the institution (or its parent in the case of a subsidiary) and would certainly have to be reported. While it is not clear if liquidity support alone would need to be reported, this is probably academic as the underlying problem (e.g. balance sheet exposure, management change) would still have to be reported. The 24 hours time limit for reporting these development would effectively set the time frame for putting in place support/remedial measures While it might be possible to empower the CBFSAI to override or grant an exemption from this reporting requirement, this would seem undesirable. The side effects could include downgrading the overall standing of CBFSAI shares relative to other companies, placing the CBFSAI in an awkward position as supervisor of the Stock Exchange, and accusations of providing excessive comfort for credit institutions. The current position of leaving it to the company to balance the risk of not reporting against the risk ofprejudicing remedial measures may be the lesser evil.
Some Tentative Assumptions and con clusioizs
Intervention should only be considered where dfficulties for the banking and/or payment systems are foreseen arising from serious problems likely to affect the long term liquidity or the balance sheet of a credit institution.
• Where the institution is substantially viable (or has a significant “goodwill value 9 a market solution (takeover or inerger may be the preferred option or the target of any short term intervention.
• Company law intervention would of its nature only from part of any package to assist a troubled financial institution, and would probably accompany or follow measures to support its liquidity.
• The Court Protection (Examinership,) procedure seems to offer the least difficulties and most advantages of all the procedures except possibly in the case of dire insolvency.
• If Court Protection is recognised as the most useful of the tools available there may be scope for fine tuning aspects of the legislation governing the initiation of the process ‘e.g. use of CBFSAI data) to render it more user friendly.
• It is doubtful f an effective form of support or supervisory action (intermediate between short term liquidity support and company law intervention.) could be devised which would enable a credit institution to continue trading in a normal or near normal manner.
• There is a need to explore further the nature of deposits as liabilities of a credit institution and the related question of when or if a liquidity problem affecting their repayment on time would constitute insolvency ( as in unable to meet liabilities as they fall due).
Appendix 2
Goodhart approach to deposit protection
Charles Goodhart, Emeritus Professor of Ranking and Finance, LSE, has recently advocated an alternative approach to the protection of depositors than the deposit protection schemes currently in place in the US and elsewhere. He argues that on receipt of evidence that a bank cannot meet its due commitments, or can do so only by persistent recourse to the Bank of England for Lender of Last Resort support, and on receipt of a letter from the Governor of the Bank of England to the effect that failure of that bank would probably have contagious consequences, the Chancellor should have the power to nationalise the bank on a temporary basis (with a maximum horizon of perhaps two years).
Once it is nationalised, the Chancellor would be expected, but not obligated, to dismiss senior management. All deposits, irrespective of currency denomination, location or counterparty would be guaranteed hut no dividends or interest on subordinated debt would be paid during the temporary nationalisation.
At, or before, the two-year horizon, the Chancellor would be required to hold an open auction to sell the bank back to the private sector, although some potential bidders might have to be prevented on competition grounds. With the auction proceeds, the Government would first be repaid for any losses in making good on the guarantees and then the remaining creditors, debt and equity holders would be paid off in strict order of seniority.
An advantage of this approach would be that no additional deposit insurance or extra regulation would be required. Crucially the scheme would penalise those who make the poor decisions: the bank managers and their shareholders. Professor Goodhart acknowledges the difficulty for governments in penalising shareholders for managerial errors, since they include charities, pensioners, voters and other worthy people.

Document 29

Strictly Confidential
Meeting with Dr Somers 21 May — Financial Stabili lanningjssues
The key message we would wish to see communicated is that the NTMA and NPRF should continue its welcome engagement with the Department of Finance, Central Bank and Irish banks to help sustain financial stability.

  1. The previous Minister wrote to the Dr Somers last December requesting his views on the role that the NIMA and NPRF might play in helping to maintain financial stability, In view of their financial resources and the commercial mandate, the NTMA / NPRF can play a very important role in helping to meeting the funding needs of the Irish banks in stressed financial market conditions.
  2. Subsequently the NTMA / NPRF have participated in discussions with the Department of Finance and the Central Bank and Financial Services Authority of Ireland (CBFSAI) on planning arrangements for helping to maintain financial stability. The Agency has also stressed its openness to discuss commercial proposals for support from the Irish banks and has had a number of meetings with various financial institutions on this basis.
  3. The main potential role of the NTMA relates to the provision of liquidity in circumstances that fish financial institutions cannot meet their funding rcquircments from the wholesale market.
  4. The NTMA has placed some deposits with the main banks. While the amounts have been relatively small, it is an important signal to the banks of support from public authorities and demonstrated the potential for the NTMA to intervene to seek to pre-empt what might otherwise lead to a major funding crisis in an Irish bank.
  5. The NTMA has indicated that it will maintain a floor to its liquidity in order to be in a position to supply emergency funding to the Irish banks if the need arose. It has also put arrangements in place in order to allow it to engage in collateralised lending to the Irish banks (i.e. providing loans secured on mortgage assets). This could act as a very important source of liquidity to the Jrish banks in circumstances that they did not wish to rely excessively on ECB liquidity support on account of the risk of a negative market reaction.
  6. The NTMA operates a strictly commercial mandate and has consistently highlighted the requirement for a Ministerial direction for the Agency in order for the Agency to engage in any of the above activities.
  7. The legal framework for the National Pension Reserve Fund was specifically designed to safeguard its independence and its strictly commercial mandate.
  8. The Fund has indicated its willingness to engage in discussions with financial institutions to help meeting their funding needs through support for Asset Covered Security (ACS) bond issuance on commercial terms (i.e. ACS are highly secure bonds issued under a specific statutory framework in Ireland). The Fund has also signalled its willingness to discuss participation in rolling over banks’ regulatory capital requirements through investment in subordinate debt (i.e. Tier 2 capital).
    In summary both the Agency and the Fund have demonstrated a willingness to engage positively with the issues that have arisen and are open to proposals from the Irish financial sector.
    There are important legislative and State aid constraints to their activities in this area, highlighting the importance of ensuring that any proposals from the financial sector have a firm commercial focus and that the assistance that the Agency / Fund is not treated by the financial sector as State support on preferential and non-commercial terms.

Hardy man jxbr, thanks.

PS. I’m sure the scans of DoF and CB documents that are released are crooked on purpose…

And (if I’m reading it correctly) it states that in order to payoff depositors without having to treat them as parri passu with bondholders, we must nationalise the bank. “Once it is nationalised,” according to Appendix 2, “the [Minister] would be expected, but not obligated, to dismiss senior management.”

“We’re not fucking nationalising Anglo.” BD

Are these documents being discussed anywhere else?

So, for those of us who are a bit slower on the uptake … the government knew full well that Anglo was up shit creek without a paddle (a.k.a insolvent), but decided to take the ultimate gamble of the Irish property madness by assuming it could be de-insolvent-ised with a bit of TLC (Biffo and Fitzy, over a game of golf), a few billion of tax payer money, and a couple of years. Is that about it?

The “Green Jersey” agenda (as spoken about by Gillian Bowler on Marian Finucane’s show on Sunday) was the Financial Regulator and the Govenor of the Central Bank getting the banks together in Summer 2008 and getting them to work in concert (illegally) to support each other, as Seán Quinn’s CFD gamble on Anglo had left a trail of blood in the water, whipping the Hedge Fund sharks into a feeding frenzy.

Having given the nod to the illegal Anglo share support scheme, the FR/CB proceeded to tie the fate of the banks and the taxpayer together. The Green Jersey was really a Green Noose.

The DoF had developed a plan to allow Anglo to go bust. The DoF had a document that clearly spelt out how Anglo (and others) couldn’t be saved without extraordinary political intervention.

The future of the country was pissed away by treasonous politicians and mandarins to bail out their cronies.

Crookedness and stupidity handed billions of taxpayer money to hedgefunds by guaranteeing what were essentially share support schemes.

And the more money the " green agenda" tried to pour in the more the hedgefunds squelaed with delight.


Don’t let detail get in the way of hanging civil servants and the public sector… :angry:

As I always pointed out, all decisions are political in the final analysis…

Eh… ¿Qué?

How was I hanging civil servants?