Consultation on Credit Institutions Resolution Fund Levy
The Central Bank and Credit Institutions (Resolution) Act 2011 (“CBCIR”) requires that the Minister for Finance make regulations prescribing the rate of contribution or a method of calculating the rate of contribution to the Credit Institutions Resolution Fund (“The Fund”).
Confirmation of the form of the regulations will be subject to formal consultation with the Governor of the Central Bank and the final decision of the Minister.
The purpose of this document is to provide for consultation on the parameters (level, rate and application) of the Levy. The Minister for Finance invites interested parties to make submissions on the making of regulations to introduce a resolution levy on authorised credit institutions.
The closing date for responses to this consultation is 27 July, 2012
Submissions received will be published on the Department’s website following the conclusion of the consultation process. Submissions may be e-mailed to:
Credit Institutions Resolution Fund Levy Consultation
Department of Finance
Upper Merrion Street
2. General principles
The general principles which should underpin industry contributions to the Fund are:
The level of contribution to it will be capable of meeting the resolution needs over time;
The level of contribution will be balanced with the need for contribution rates to be consistent with financial viability and sustainability of contributing institutions firms
The rates of contribution will take account of relevant distinctions between financial sectors and of the impact on individual credit institutions within each sector. These include the nature, scale and complexity of institutions and their levels of capital and liquidity.
That all licensed banks, credit unions and credit unions should contribute to the Fund
3. Scale of the Resolution Fund
In considering the level of resources to be included in the Resolution Fund the following considerations are relevant.
An objective of Ireland’s bank resolution regime is to provide the tools to resolve banks in an orderly manner. The scale of the Resolution Fund needs to be seen in the context of the use of the other resolution tools. Thus it is anticipated that in the future, bank failures will not impose the same costs on the Exchequer that they have in the past.
Raising through levies an amount sufficient to pre-fund any possible future resolution actions would risk simply replacing one form of implicit State guarantee with another. It is not clear that it would be available to seek to grow a resolution fund to a scale which could be expected to fund all the costs of a failure in financial institutions.
The advantage of levying of an ex ante fund is that all authorised credit institutions in the market have to contribute to the levy. This is more appropriate than a purely ex post situation where only the survivors remain to contribute to a levy.
Raising large amounts through ex ante levies also has an opportunity cost, in that it would withdraw from circulation a significant amount that could have alternative productive uses: for example, lending to customers, or investing in businesses.
To date €250m has been provided to the Resolution Fund by the Minister for Finance. This was provided at the end of 2011 with a view to meeting credit union resolution costs that were anticipated to arise. When there is resolution expenditure from the Fund by the Minister this will be recouped from contributions made to the Fund by credit institutions.
It is proposed that in the medium to longer term, €100m would be retained in the Fund on an ongoing basis to cover any future resolution costs for financial institutions, but that the Fund would be capped at this amount.
Arising from discussions with the Central Bank it is intended that an overall contribution of around €25m per annum to the Resolution Fund will be sought up to the time the requirement for a €100m Fund is met. This would be broadly in line with the approach envisaged in the recently published EU Commission proposal for a Directive establishing a framework for recovery and resolution of credit institutions and investment firms.
The Regulations underpinning the Fund would be reviewed regularly ensure that the level, rate and application of the Levy are appropriately calibrated.
4. Sectoral Levies to meet approximately €25mn per annum funding
Taking into account the principles set out in the preceding paragraphs and consistent with section 15 of the CBCIR Act it is proposed to differentiate between three classes of credit institutions in determining contribution rates which take account of the specific circumstances of each class.
A. Credit Unions
The Report of the Commission on Credit Unions, among other proposals, envisages structural changes to resolve the financial and organisational difficulties in the credit union sector. A core recommendation is that the credit union sector should be restructured and that the funding of this process could be carried out through excess capital within participating institutions. The affordability of sector wide contributions should be assessed having regard to the cost of existing and impending levies on the credit union sector for regulation, resolution and stabilisation.
Taking into account the need to recoup the Minister’s contribution to the Resolution Fund, the current difficult financial circumstances of the credit union sector and the current and possible impending levies, a simple formula is proposed under which each credit union would be required to pay 0.05% of total assets per annum. If applied to all credit unions, this would generate €7mn in resolution levies annually. As an illustration, a typical small credit union (€10mn in assets) would be required to pay €5,000 annually; a large credit union (€100mn) would be required to contribute €50,000 each year.
B. Domestic-focused retail banks
The capacity of the domestic-focused retail banks to make substantial contributions is limited at present. The requirement to extract Resolution Fees from these banks needs to be balanced against the objectives of strengthening their balance sheets, rebuilding market confidence, and maximizing the return on the State’s investments.
It is proposed that the Resolution Fund should seek to raise funds not in excess of €17mn per annum from domestic-focused banks. Contributions would commence once the Covered institutions cease to be encompassed by the Credit Institutions (Stabilisation) Act 2010 (“CISA”) regime i.e. in 2013.
The levy could be linked to capital requirements, which is ultimately based on the risk profile and assets size of the institution.
C. IFSC Banks (i.e. Irish-licensed banks not principally operating in the domestic market)
There are 24 non-domestic-focused, Irish-licensed banks – primarily investment banks based in the IFSC – that are subject to resolution levies under the terms of the CBCIR Act.
There are several factors that need to be taken into account in determining the appropriate contribution from this sector which constrain the amount that can reasonably be raised from these banks. Firstly the sector’s capacity to make substantial contributions in the present circumstances is limited. Secondly, in the event that an IFSC bank failed in the future, it would be likely that the entity’s parent, or if necessary, the home country of the parent, would bear the losses rather than the Irish Exchequer. Thirdly, many of the institutions concerned are European-owned and the parent entities will, in many cases, pay resolution levies on a consolidated basis in their home Member State.
Taking these factors into account, it is considered that the Resolution Fund should seek to raise funds not in excess of €1mn from IFSC banks in the first year of its operation. It is proposed that individual banks’ rate of contribution in this sector should vary according to their capital requirement.
Scope of the Resolution Fund as defined in the CBCIR
Section 10 of the CBCIR Act provides that the purpose of the Fund is to provide a source of funding for the resolution of financial instability in, or dealing with an imminent threat to the financial stability of an authorised credit institution. Specifically, the Fund can
·Reimburse the Minister for any financial incentive paid to an authorised credit institution under section 46 of the CBCIR Act
·Pay for a range of costs linked to assessment for compensation where there is a transfer of assets and liabilities in the context of the resolution of an authorised credit institution
·Provide capital for a bridge bank with the written consent of the Minister
·Meet the Central Bank’s expenses in discharging its functions under the CBCIR Act
Section 15 of the CBCIR Act also provides that in making the regulations for the rate of the contribution to the Fund the Minister is required to take into account the need for the Fund to grow over time to a size commensurate with the costs that might be involved in carrying out resolution activities under the CBCIR.
There is also a requirement in Section 15 of the CBCIR Act that the rate of contribution by an authorised credit institution or class of such institution needs to be consistent with maintaining the financial viability and sustaining the commercial position of such authorised credit institutions.
 The covered institutions are “relevant institutions” for the purposes of CISA and while that Act is in operation to end 2012 they are not covered by the CBCIR Act and therefore not subject to being levied for the Resolution Fund until then.