ANALYSIS:Banks could face fines of up to €10bn if they fail to plan how they would resolve problems

LATE LAST year the Government enacted powerful legislation to restructure a failed banking sector over the next two years.

Yesterday the Department of Finance published legislation to deal with failed banks in an otherwise healthy banking sector for perpetuity.

Last year’s Credit Institutions (Stabilisation) Act was draconian and, in the Government’s view, necessary to fix a banking system that had cost the taxpayer so much (€46 billion and still to rise further).

This legislation will remain in effect until the end of 2012.

The aim is that the Central Bank and Credit Institutions (Resolution) Bill, published yesterday, will then come into effect to deal with any bank failures after that date.

Both pieces of legislation meet conditions agreed by the Government with the European Union and International Monetary Fund under the €85 billion bailout plan.

The Government had to publish legislation setting up a so-called special resolution regime by yesterday’s deadline set by the EU-IMF.

The legislation will give the Central Bank the power to take control of banks, appoint managers to run them and fire directors, staff or consultants, and to move their deposits and loans to other banks.

The tricky subject of whether bank bondholders should share in the losses of a failed bank has been fudged in this draft of the Bill.

The legislation says that the liquidator of a bank should prioritise the rights of depositors ahead of other creditors in a bank.

Under the Bill, the first objective in the liquidation of a bank is to protect depositors.

The second objective is to “wind up the affairs of the authorised credit institution so as to achieve the best results for that credit institution’s creditors as a whole”.

The buck has been passed on the bondholder issue until there is clarity at EU and international level around how senior bondholders – who have the same level of protection as depositors – can be forced to bear the losses of banks.

The new legislation is expected to be put through the wringer of amendments in the new Dáil so its powers may yet include some pain for senior bondholders.

The new government is likely to raise possible ways of sharing the future costs of a bank failure with senior bondholders in talks at EU and international level given Fine Gael’s election stance on the issue.

The key difference in the new legislation is that it forces the banks themselves to contribute to a special resolution fund to cover the cost of a troubled bank.

The new minister for finance will publish regulations setting out the contribution of each bank and the method of calculating their individual levies. Failing to contribute can lead to a fine of €250,000 against a bank.

In some respects, the new legislation is as severe as last December’s emergency bank reform law. Distressed banks could face fines of up to €10 billion – and their directors and managers the same fines and up to five years in jail – if they fail to plan how they would recover or resolve their problems.

The resolution regime being created under this Bill aims to prevent another Anglo Irish Bank-style collapse occurring over the coming years and taxpayers being forced to pick up the bill.