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Government powers coming out of the deposit scheme bill
Joe Beashel
Joe Beashel looks at the details of the guarantee deposit scheme and the details of the legislation that went through last week.
On Tuesday evening 30 September 2008, the Government published the text of the legislation to give effect to its announcement earlier that day that the State would guarantee both the deposits and certain borrowings of some Irish authorised banks and building societies namely, AIB, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the EBS Building Society (the 'relevant institutions'). The power will also extend to subsidiaries of such relevant institutions. The indications are that this will not be extended to Irish authorised credit institutions who are subsidiaries of larger non-Irish banking groups. In this regard the EU’s Competition Commissioner, Neelie Kros, is reported to be in 'close contact' with Irish authorities.

The Credit Institutions (Financial Support) Bill (the 'Bill') is a relatively short enabling piece of legislation that gives very broad powers to the Minister for Finance (the 'Minister'). By the time this article is published, the Bill is likely to be enacted as it is being rushed through the legislative process and is likely to be signed into law by the President today, Wednesday 1 October 2008. Some amendments will likely be made before the Bill is finalised but key provisions of the Bill as outlined below are unlikely to be materially altered.
Joe Beashel


The Bill provides that the functions of the Minister provided for in the Bill are necessary, because the Minister is of the opinion that there is a serious threat to the stability of credit institutions in the State generally or there would be such a threat if those functions were not performed. In introducing the Bill, the Minister referred to the recent market turmoil in the USA and the UK and stated that '…it was only a matter of time before these difficulties visited our shores…and the credit freeze intensified starving our financial institutions of the funding to finance their normal activities.'

For a two year period commencing 30 September 2008 the Minister is to be given very broad powers to make regulations ‘to do anything that appears necessary or expedient for bringing this Act into operation.This broad discretion is only tempered by the requirement to consult with the relevant other Ministers of the Government and to have the regulations approved by both houses of the Oireachtas (Parliament).

Very wide powers to provide financial support

The key powers are contained in Section 6 of the Bill, which provides that the Minister may provide financial support in respect of the borrowings, liabilities and obligations to the Central Bank or any other person, of any credit institution or subsidiary, which the Minister may specify by order. Financial support includes a loan, a guarantee, an exchange of assets and any other kind of financial accommodation or support.

The Minister is given broad power to provide the support on 'such commercial or other terms and conditions as the Minister thinks fit'. Any such scheme of support will be subject to limited supervision of the Oireachtas which will have the power to annul the scheme entirely but not the power to alter or amend the scheme.

In the context of the very broad powers to be given to the Minister, some parameters are specified:

1.All financial support must, so far as possible, ultimately be recouped from the credit institution or subsidiary which received it.

The Minister has indicated that the guarantee is not 'free' and that the taxpayer will be remunerated for the value of the support provided. He indicated that he will be working with the Central Bank and the National Treasury Management Agency ‘to put a fee mechanism in place to remunerate the taxpayer for providing the guarantee’.

2. Conditions relating to 'the commercial conduct' of the credit institution or subsidiary may be specified including conditions to regulate 'the competitive behaviour' of that credit institution or subsidiary.

3. Conditions may be imposed to require compliance by the credit institution or subsidiary with the requirements of the Central Bank or Financial Regulator in relation to the 'conduct of its business and its competitive behaviour'.

4. The Minister may acquire a shareholding or acquire other securities in the institution that benefits from support on such terms as he sees fit.

5. Any monies advanced will be repayable with interest.

6. No support can be provided after 29 September 2010 and any financial support provided 'shall not continue beyond that date'. This would imply that all guarantees or other supports given cease on this date.

Amendments to merger control

If a proposed merger or acquisition involves a credit institution and the Minister considers that the merger or acquisition is necessary to maintain the stability of the financial system in the State, then the power to determine whether or not the merger or acquisition should be approved under the merger control provisions of the Competition Act 2002 will lie with the Minister and not the Competition Authority. Section 7 of the Bill provides that such mergers will be notifiable to the Minister, rather than the Authority and that such mergers may not be implemented without Ministerial approval.

The Bill sets out the circumstances in which the Minister will be able to approve such a merger or acquisition including an obligation to invite submissions from affected third parties, powers to request information from the merging parties and to request assistance from the Competition Authority and other advisers, and an obligation to make a decision whether to approve a transaction ‘as soon as reasonably practicable’ after the Minister receives a notification.

The Minister will be authorised to approve a merger or acquisition, even in circumstances where the 'effect of the transaction will be to substantially lessen competition', where he believes it is necessary:

1. to maintain the stability of the financial system in the State
2. to avoid a serious threat to the stability of credit institutions
3. to remedy a serious disturbance in the economy of the State

The Minister will also be able to impose such conditions on an approval decision as he considers appropriate to facilitate competition in the relevant markets.

Summary

The immediate effect of the announcement was to see shares in those relevant institutions that were listed increase dramatically. The measure has attracted both positive and negative comment, domestically and internationally, but the balance at this early stage seems to be to view this as a positive initiative. Only time will tell whether this bold measure will be successful in allowing the Irish financial system, and the economy in general, to weather the current financial storms.


The ongoing market turmoil has sparked a number of developments in the covered bond market in relation to liquidity, issuance, and proposals for US covered bonds, writes Mike Percival of Irish Banking Federation. He says, covered bonds are set to be strongly positioned to take a central position in the inevitable migration to quality and simplicity.


Author Details: Joe Beashel is a partner in the banking and financial services department and head of the firm’s regulatory risk management and compliance group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: joe.beashel@mop.ie. Further information on Matheson Ormsby Prentice is available at www.mop.ie.