ECB fears over bank Bill giving Minister new powers

Mon, Dec 20, 2010, 00:00

THE EUROPEAN Central Bank has told the Government that it has “serious concerns” about the Credit Institutions (Stabilisation) Bill, which gives the Minister for Finance sweeping powers to intervene in the banking sector.

In a seven-page opinion signed off by ECB president Jean-Claude Trichet, the Frankfurt-based institution raised concerns that the draft law is “insufficiently legally certain” on a number of critical issues for the euro system.

The ECB said the laws could usurp its rights over the collateral given as security for liquidity purposes to banks.

It also said “problems of legal uncertainty” related to the impact of the legislation on the rights of the Central Bank of Ireland, the ECB and “possibly” other central banks in the euro area.

President Mary McAleese has already convened a meeting of the Council of State for tomorrow to advise her on the emergency banking legislation. The President will then decide if she should refer the legislation to the Supreme Court to test its constitutionality.

Opposition parties have also raised concerns about the sweeping powers granted to the Minister for Finance in the Bill.

The warning from Mr Trichet reflects ECB fears of the risks involved in providing liquidity to Irish banks. The most recent data show Irish banks having €136 billion in loans outstanding from the ECB – a quarter of the total in the euro zone – and €45 billion in emergency liquidity assistance from the Irish Central Bank.

To obtain liquidity euro zone banks have to put up assets as collateral. The ECB’s concern is to ensure it always holds enough collateral of sufficient quality to minimise its exposure were some of the funds it provides not paid back.

The paper from Mr Trichet is the latest manifestation of the ECB’s worries about the risks it is carrying as it battles the euro zone’s mounting debt crisis.

Last week the ECB announced it would increase by €5 billion to €10.76 billion its subscribed capital as part of plans to shore up its financial strength. Since May the ECB has bought €72 billion in euro zone government bonds to stop its borrowing costs getting out of control.

Irish Government bonds are likely to comprise a large part of the total, although no details are given.

Mr Trichet also said he would have “appreciated” being consulted at an “earlier stage” on the draft legislation, which formed part of the recent bailout deal agreed by Ireland with the International Monetary Fund and the EU.

Minister for Finance Brian Lenihan made a request to the ECB for an opinion on December 10th. Mr Lenihan asked that it be delivered by December 17th. The opinion was posted on the ECB’s website last Friday. In the paper the ECB said that given time constraints it could not assess all of the “many constitutional, other legal and regulatory issues” in the Bill.

A Department of Finance spokesman said there was “no question of the Central Bank, ECB or any national central bank, as creditors to the guaranteed institutions, being exposed financially by the exercise of the Minister’s powers under the Bill”.

He said it was “inconceivable” that the Minister would make specific directions or implement specific asset transfers unless these were supported by the Central Bank.

The spokesman added that the consultation period was constrained as work on the bulk of the Bill only started at the end of November.

The ECB was sent a close-to-final draft on December 11th.

The emergency powers, which are set to last until the end of 2012, would allow the Minister for Finance to transfer assets and liabilities at Irish-owned institutions; appoint a special manager to take over the running of a bank; override the decisions of shareholders and directors; and make directions in relation to subordinated liabilities.

The ECB did welcome the “wider powers” the Bill would give the Government to resolve a financial crisis. But it said the Irish framework “may have to be adapted in the light of the forthcoming commission’s legislative proposals on a union crisis-management and banking resolution regime. – (Additional reporting by the Financial Times)