State will acquire sweeping powers in banking Bill

Wed, Dec 15, 2010, 00:00

THE GOVERNMENT will have far-reaching powers to restructure the banking system, including the ability to force losses on to subordinated bondholders and stop future bonus payments to staff, under a draft law published yesterday.

The sweeping measures will allow the Minister for Finance to transfer loans and deposits out of the lenders in a bid to reduce the size of the banking system.

Special managers can be appointed to a bank by the Minister if it is faced with “an imminent threat” to its stability. They will have powers to sack directors and over-rule shareholders.

The law will allow the Government to pump further cash into AIB, which has a €9.8 billion capital hole, before the end of the year, effectively nationalising a fourth lender.

It will also enable the Government to start winding down Anglo Irish Bank and Irish Nationwide Building Society within weeks, paving the way for the transfer of their deposits to other banks.

The new legislation, the Credit Institutions (Stabilisation) Bill, will be rushed through the Dáil today and is expected to be passed by the Oireachtas by the end of the week.

The Bill will go to the Seanad tomorrow and then be the subject of an early signature motion, which will lead to it being sent to President Mary McAleese to be signed into law at the earliest opportunity.

Under the Bill, the Government can provide guarantees on loans within the banks to allow them to be sold to investors to reduce the size of the banking system.

The law will enable the Government to “take the actions required to bring about a domestic retail banking system that is proportionate to and focused on the Irish economy”, said Minister for Finance Brian Lenihan.

A change in the investment rules for the €25 billion National Pension Reserve Fund (NPRF) will also allow it to invest in companies that are not listed on stock markets.

This would allow the Government to acquire 100 per cent of AIB, thus wiping out shareholders’ investments and removing it from the stock market, and still use the NPRF to recapitalise the bank.

The new powers, which will expire at the end of 2012, contain a number of draconian measures and also apply to credit unions.

Any party found leaking information on any decision made or proposed by the Minister under the law can be fined €100,000 and imprisoned for up to three years.

Bank losses can be forced on to subordinated bondholders – lenders to the banks who receive a higher interest rate – under the Bill, but senior bondholders will escape any loss-bearing measures.

The Bill also creates a legal grounding to force AIB to stop the payment of more than €35 million in bonuses to 1,460 staff.

The Bill makes it unlawful for a bank to make a payment that would amount to a breach of the terms and conditions imposed by the Minister for Finance in return for State financial support.

One condition listed in the Bill says that “bonuses are unlikely to have been paid if the State had not enabled the relevant financial institution to meet its financial and regulatory obligations”.

The political and legal strategy to deal with AIB’s embarrassing decision to pay bonuses was devised during weekend discussions involving Taoiseach Brian Cowen, Mr Lenihan and Attorney General Paul Gallagher.

Mr Cowen told the Dáil that while one AIB employee who won a court case on the issue would have to be paid a bonus, this would not automatically apply to 91 other employees who had sued the bank.

The issue of the 91 employees was not the same as the 1,460 who were entitled to a bonus, he said.

“This is difficult territory in legal terms, but we believe this is the means by which we can ensure that bonus payments are not paid, and to do so in a way that withstands legal scrutiny,” Mr Cowen said.