Draconian powers to help Minister fix failed system

ANALYSIS:Bill to let Government finally consign Anglo and INBS to scrapheap amid sweeping reforms

IT IS emergency legislation introduced two years after the emergency and following the arrival of the overseas rescue services from the European Union and the International Monetary Fund.

Even the name – the Credit Institutions (Stabilisation) Bill – is something of a euphemism. Credit Institutions (Put Out The Remaining Firestorms and Rebuild The Street) Bill might have been more appropriate.

The aim of the new legislation is to give the Government sweeping powers to clean up the banking system and consign the failed institutions – Anglo Irish Bank and Irish Nationwide Building Society – to the scrap heap, albeit through a measured wind-down over time.

The Bill gives the Minister for Finance – working with the Central Bank governor – sweeping, and in some cases draconian, powers to repair the banking system.

The legislation creates powers to make the sector much smaller so that it is no longer as big a drag on the State and to ensure the Government can borrow again in the markets at sustainable interest rates without the crutch of a EU-IMF aid package.

The Department of Finance would argue that it could not have introduced such heavy-handed legislation when the crisis struck in 2008, as it would have damaged the standing of the banks in the markets and that the State could not have afforded it without the €85 billion EU-IMF aid package.

This argument is weak – the stock markets wrote off the banks long ago and the debt markets, which provide the lifeblood of liquidity to the banks – have gradually lost faith ever since.

The kind of legislation published yesterday, or even a watered-down version of it, should have been introduced soon after the €440 billion blanket bank guarantee was put in place by the Government in September 2008, leaving the State so firmly on the hook for the debts of the banks.

Indeed, the new Bill even acknowledges that one of the purposes of the legislation is “to protect the State’s interest in respect of guarantees issued by the State under the Credit Institutions (Financial Support) Act 2009”.

This is an admission that the guarantee left the State exposed and that new legislation is needed to mitigate the fall-out from it.

While the Government’s agreement with the EU-IMF-ECB troika outlined the broad thrust of the €35 billion plan (within the overall €85 billion plan) to shrink the size of the banks, this legislation gives the Minister a large arsenal of powers to tackle this. The four main weapons it provides to help stabilise the financial system are:

* Wide-ranging powers to issue directions to the banks to take or prevent any actions to support the Government’s banking strategy;

* The power to transfer assets (loans) and liabilities (deposits) out of banks to restructure them, breaking them up to make the sector substantially smaller;

* The power to appoint a special manager to a failed or distressed financial institution, including a credit union;

* The power to share a bank’s losses with subordinated bondholders, creditors who provided loans to a bank for higher returns.

Most of the new measures are unlikely to be used immediately, but there is a time limit on the powers. The legislation will cease to exist on December 31st, 2012.

Some powers will be used within weeks – to start the wind-down of Anglo and Irish Nationwide and to recapitalise and nationalise Allied Irish Banks.

The legislation allows for the merger of Anglo and Irish Nationwide and their joint wind-down, and the transfer of their deposits – amounting to €14 billion and €4 billion respectively – to others, most likely AIB or Bank of Ireland.

The powers will also be used to pump further cash into AIB before the end of the year, leaving the bank effectively nationalised and ending its 44-year life as a non-government enterprise.

Whether the Government takes full 100 per cent ownership of AIB or leaves some shares on the stock market is academic, resting now around technical issues.

The legislation was urgently required if the Government is to meet EU-IMF deadlines to wind down Anglo and Irish Nationwide by the end of January, and to meet deadlines through next year for the restructuring of the banks.

The new powers will change the investment rules for the National Pension Reserve Fund, the State’s €24 billion rainy day fund which has been raided to save the banks.

The fund has until now only been permitted to invest in stock market companies. The Bill will allow it to invest in non-listed businesses.

This will create flexibility for the Government, allowing it to take AIB off the market, if necessary, and still pump the required €9.8 billion into the bank. It would also allow the Government to inject the further €963 million required at the EBS Building Society if it is not sold.

Among the more severe measures in the Bill are the powers bestowed on a special manager appointed to a failed bank who, among other things, can sack directors and other staff.

The Minister will be able to stop bonuses to bank staff as a condition of financial support, which would prevent a recurrence of AIB’s €40-million bonus debacle.

The Bill can “override” any existing law, code of practice or applicable listing rules of any regulated market, while the High Court can prevent the media reporting any direction sought by the Minister under the legislation.

The Bill will also enable outside investors to buy into the banks. The Government can apply guarantees to parts of the lenders to allow them to sell off assets to shrink the overall size of their businesses.

As promised, the legislation will force “burden-sharing” of bank bailouts with subordinated bondholders. This will be done on a case-by-case basis, depending on the scale of the losses in the bank and whether they have a future. This discretion will allow the Minister to distinguish between the stronger and weaker banks, depending on the scale of losses to be shared with bondholders.

But, in the first instance, the Government will seek voluntary deals with bondholders, offering them repayment of their debts at a deep discount – similar to the 20 cent in the euro exchange Anglo is seeking and Bank of Ireland’s higher offer of about 50 cent in the euro to its lenders.

These deals can be viewed as the carrot, the new Bill the stick.

The EU and IMF noted that the Government had been hobbled by not having a so-called “special resolution regime” – effectively a suite of measures it could use to deal with failed institutions when the banking crisis struck in 2008.

Such a regime must be introduced by the end of February under the EU-IMF deadlines. But this will deal with a particular failed institution in future, which could be a non-guaranteed bank an international bank in the IFSC or an insolvent credit union.

In a time of financial and economic war, more severe legislation was required to deal with the shattered domestic banks – yesterday’s Bill gives the Minister far-reaching powers to deal with not one failed bank, but with a failed system.

Simon Carswell is Finance Correspondent