Opinion of the European Monetary Institute on a consultation from the Irish Department of Finance under Article 109f (6) of the Treaty establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI as elaborated in the Council Decision of 22nd November 1993 (93/717/EC) (the “Decision”) on a proposal for legislation entitled the Central Bank Bill (the “Bill”) (CON/96/04)
Date: 1996-05-28
Institutions: European Monetary Institute
Subjects: European System of Central Banks, Ireland, central bank, financial institution, financial stability, financial statistics, financial supervision, national accounts, payment system, single monetary policy

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  from  the  Irish  Department  of  Finance  under  Article  109f  (6)  of  the  Treaty

establishing  the  European  Community  (the  “Treaty”)  and  Article  5.3  of  the  Statute  of  the  EMI  as

elaborated  in  the  Council  Decision  of  22nd  November  1993  (93/717/EC)  (the  “Decision”)  on  a

proposal for legislation entitled the Central Bank Bill (the “Bill”).

CON/96/04

1.

The above consultation was initiated on 25th March 1996 by the Irish Department of Finance,

which requested an opinion of the EMI within one month of receipt of the consultation, i.e. by

1st  May  1996.    For  this  purpose,  the  Department  of  Finance  submitted  the  text  of  the  above

draft legislation together with explanatory memoranda.

2.

The EMI’s competence to deliver an opinion is based on Article 1, section 1 of the Decision, as

the Bill relates, inter alia, to the following: the status and powers of the Central Bank of Ireland

(second  indent  of  section  1);  the  collection,  compilation,  and  dissemination  of  balance  of

payments, national accounts and other financial statistics (third indent of section 1); approval

and supervision of clearing and payment systems (fourth indent of section 1); and, rules which

are  applicable  to  the  regulation  by  the  Central  Bank  of  Ireland  of  financial  institutions  and

which may have an impact upon the stability of financial institutions and markets (fifth indent

of section 1).  In this opinion, the EMI will restrict comments to those parts of the Bill which

relate to the above areas of competence.  It should also be noted that, in giving this opinion, the

EMI has not reviewed all the existing provisions of Irish legislation to which the Bill refers and

relates.

3.

The  EMI  welcomes  those  provisions  in  the  Bill  which  would  enhance  the  influence  of  the

Central Bank in relation to the oversight of payment systems established in Ireland.

The EMI notes that sections 14 and 15 of the Bill will give the Central Bank wide powers to

suspend  operations  of  the  system  where  terms  of  the  original  or  subsequent  approval  of  the

system are breached and to revoke its approval in certain circumstances.  However, the exercise

of the Bank’s powers to order a payment system to cease activities or to suspend operations on

an immediate basis is dependent upon the Bank having first imposed a condition or requirement

on  the  system  which  has,  subsequently  not  been  complied  with.    To  ensure  that  emergency

situations can always be adequately dealt with the EMI recommends consideration of an ability

for the Bank, where extreme circumstances exist, to require immediate suspension of operations

by  a  system  or  by  one  or  more  of  its  members,  irrespective  of  the  prior  imposition  of  any

condition  or  requirement.    Albeit  that  such  powers  would  clearly  require  to  be  subject  to

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subsequent review by the courts and would also require to be tied in effectively with all other

powers of the Central Bank in this area, including the provisions contained in sections 14 and

15 of the Bill as drafted, so as to ensure a coherent set of powers in this area.

4.

The  EMI  expressly  welcomes  the  provisions  contained  in  sections  21,  22  and  23  of  the  Bill

which are designed to enshrine the following principles in Irish law: finality of payments; the

immediate ability of lenders to realise collateral; and, the legal enforceability of bilateral  and

multilateral netting arrangements.

However, the EMI would suggest consideration of amendments to each of sections 21 and 22.

In the case of section 21 it might prove advisable to include a more detailed provision stating at

what point in the process of settlement payments are  to  be  considered  final  and  irrevocable  -

will  this  occur  upon  transmission  of  instructions  to  settle  or  does  settlement  require  to  have

taken place?  In the absence of such additional detail there is a danger that confusion may arise

as to when this provision comes into effect.  It is also noted that the provision only provides for

finality and irrevocability between the credit institutions concerned, thereby implying that this

will  not  be  enforceable  against  third  parties.    The  EMI  would  encourage  consideration  of  a

wider  provision  expressly  stating  that  finality  and  irrevocability  would  also  be  enforceable

against third parties (e.g. a liquidator or third party creditor).

The EMI welcomes the provision in section 22 which would have the effect of ensuring that the

Central  Bank  may  realise  collateral  or  securities  immediately  upon  the  default  of  a  credit

institution  in  relation  to  the  loan  against  which  such  collateral  or  security  is  held  -  thereby

presumably  overriding  any  provisions  of  Irish  law  which  would  obstruct  such  immediate

realisation.    In  view  of  Stage  Three  of  EMU  and  the  operation  of  a  single  monetary  policy

among  participating  member  states,  the  EMI  would  suggest  that  consideration  be  given  to

extension of this provision so that its benefits not only cover the Central Bank but also extend

to both the European Central Bank and other EU central banks.

The EMI also welcomes the provision contained in section 50 whereby the Central Bank is to

be  notified  of  any  application  for  the  winding-up  of  a  licensed  bank  before  the  petition  is

presented and considers that this will be a potentially valuable tool in enabling the Central Bank

to  protect  payment  systems,  particularly  those  over  which  it  exercises  supervisory  powers.

However,  it  is  noted  that  the  explanatory  memorandum  relating  to  this  provision  in  the  Bill

states that the reasoning for its introduction is the avoidance of potential damage which might

otherwise be caused by the existence  of  zero  hour  rules.    The  explanatory  memorandum  also

notes  that  there  is  no  precedent  under  Irish  law  for  a  zero  hour  ruling,  but  that  this  is  not

precluded.    The  EMI  would  therefore  encourage  the  Irish  authorities  to  consider  a  provision

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(either within the Bill or within future legislation) which would put this issue beyond doubt by

stating  that  there  is  no  possibility  of  a  zero  hour  ruling  having  effect  in  relation  to  validly

constituted  payments  and  financial  contracts.    Such  a  provision  would  be  of  great  potential

benefit in enhancing the stability and security of financial markets where an entity which would

be subject to Irish insolvency law participates.  This effect could be achieved, for example, by

an expanded section 21, as suggested above.

5.

The EMI notes the provision, contained in section 28 of the Bill, requiring the Governor of the

Central  Bank  to  appear  before  a  relevant  Select  Committee  of  the  Dail  Eireann.    Such  a

provision  is  not  in  principle  inconsistent  with  the  requirement  for  independence  of  central

banks, imposed by Article 107 of the Treaty as reflected in Article 7 of the ESCB/ECB Statute.

6.

The  EMI  notes  the  further  extension  of  the  prohibition  imposed  upon  the  Governor  of  the

Central Bank  from  being  a  director  or  holding  shares  in  a  bank  and  that  this  prohibition  will

now  cover  all  commercial  credit  institutions  and  financial  institutions  and  welcomes  the

additional degree of independence which this will ensure for the office of Governor.  However,

one  NCB  has  stated  that  this  view  should  not  prejudice  further  discussions  on  criteria  for

central bank statutory requirements to become an integral part of the ESCB. 

7.

The  EMI  welcomes  the  simplification  of  the  tenure  of  office  of  the  directors  of  the  Central

Bank, to a standard period of five years from the date of appointment.

8.

In the light of the progress achieved by the  EMI, in close co-operation with the Commission,

with  respect  to  the  preparatory  work  in  the  field  of  statistics,  an  expansion  of  section  8,

subsection (a) of the Central Bank Act 1942 along the following lines is suggested:

“(a) make  provision  for  the  definition,  collection  and  study  of  data  relating  to  monetary,

financial, balance of payments and credit developments and publish related material;”

Subject to this expansion, the EMI welcomes the provision contained within section 30 of the

proposal since it embodies the desired level of co-operation between central banks and relevant

national  statistical  institutes  within  the  limits  of  their  respective  competences.    However,  to

ensure  that,  in  the  future,  the  Central  Bank  will  be  fully  able  to  comply  with  its  obligations

under Article 5 of the ESCB/ECB Statute as a member of the ESCB in Stage Three of EMU the

EMI  also  considers  that  it  would  be  important  to  insert  “without  prejudice  to  subsection  (a)

above,” at the start of the envisaged, new subsection (d).

9.

The EMI notes the additional powers which are proposed for the Central Bank in the field of

supervision and regulation of credit institutions and other financial institutions.  To the extent

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that these changes provide the Central Bank with greater abilities to enhance the stability and

security  of  financial  institutions  and  markets,  they  are  a  welcome  addition  to  the  Irish

regulatory environment.

10.

The EMI welcomes the provisions contained in section 52 to 57 having the effect of removing

provisions  which  previously  allowed  the  Central  Bank  of  Ireland  to  provide  financing  to  the

public  sector,  noting  that  these  changes  have  been  initiated  with  the  intention  of  compliance

with Article 104 of the Treaty.

11.

The EMI notes that it is the intention of the Irish authorities to bring forward further legislation

to ensure that, by the date of the establishment of the ESCB, Irish legislation is compatible with

the Treaty  and  the  ESCB  Statute  and  thereby  to  comply  with  the  terms  of  Article  108  of  the

Treaty and Article 14.1 of the ESCB/ECB Statute.  The EMI also notes that adaptations will be

required to allow national central banks to function as an integral part of the ESCB, as stated in

Article  14.3  of  the  ESCB/ECB  Statute  and  it  may  be  foreseen  that  amendments  to  the

legislation relating to the Central Bank are also likely to be required for this purpose.

12.

The EMI confirms that it has no objection to this opinion being made public.

28th May 1996