Bill to cover subordinated debt and transfer of bank deposits

NEW RULES regarding the subordinated debt of Irish banks, including Bank of Ireland and AIB, and a proposal to transfer the deposits of Irish Nationwide Building Society to Anglo Irish Bank, are expected to be introduced tomorrow as part of the Credit Institutions (Stabilisation) Bill 2010.

The Bill – one of the most substantive pieces of legislation to be brought before the Oireachtas this year – will allow the various recommendations relating to the Irish banking system outlined in the Irish International Monetary Fund/EU memorandum of understanding to be enacted into law.

It is expected that details regarding the proposed merger of Irish Nationwide Building Society and Anglo Irish Bank, which are to be wound down, will form a major strand of the legislation, with the Government announcing a plan to transfer the deposits of Irish Nationwide Building Society to Anglo Irish Bank.

This deposit book will then be sold off to other financial institutions, most likely AIB and Bank of Ireland.

Anglo Irish Bank and Irish Nationwide are due to submit a joint restructuring plan to the European Commission by the end of January, outlining how both institutions are to be wound down over time.

The impact of the possible transfer of Irish Nationwide’s deposits to Anglo Irish Bank on the employees of the building society is unclear.

Anglo Irish Bank’s deposits stand at about €14 billion, while Irish Nationwide holds approximately €4 billion in deposits.

The Bill will also cover the thorny issue of subordinated bank debt, with the Minister for Finance likely to propose some form of burden-sharing by subordinated bondholders in Irish banks, including AIB and Bank of Ireland.

The Bill is set to be brought to the House immediately following tomorrow’s two-hour debate on the memorandum of understanding, and is scheduled to conclude by 10pm.

The Bill is one of the first formal steps in what is expected to be a radical restructuring and downsizing of the Irish banking system over the next 12 months.

The memorandum of understanding reached with the EU and the IMF specified a number of changes to the Irish banking system, including a schedule for updated stress tests, new loans-to-deposits targets, and a reduction of the size of the banking sector, through selling off loans and “non-core” businesses.

The document made specific mention of the issue of burden-sharing by holders of subordinated bank debt, indicating that “forced burden-sharing” with subordinated bondholders would be considered, though a debt buy-back or swap was also a possible option.