Opinion of the European Central Bank of 25 February 2009 at the request of the Irish Minister for Finance on a draft National Pensions Reserve Fund (Amendment) and Miscellaneous Provisions Bill 2009 (CON/2009/16)
Date: 2009-02-25
Institutions: European Central Bank
Subjects: Ireland, credit institution, financial stability, investment, issue of securities, national law, pension fund

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 25 February 2009 

at the request of the Irish Minister for Finance 

on a draft National Pensions Reserve Fund (Amendment) 

and Miscellaneous Provisions Bill 2009 

(CON/2009/16) 

Introduction and legal basis 

On  23  February  2009  the  European  Central  Bank  (ECB)  received  a  request  from  the  Irish  Minister  for 

Finance  (hereinafter  the  ‘Minister’)  for  an  opinion  on  a  draft  National  Pensions  Reserve  Fund 

(Amendment) and Miscellaneous Provisions Bill 2009 (hereinafter the ‘draft law’). 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  Articles  105(4)  and  105(5)  of  the  Treaty 

establishing the European Community and the third and sixth indents of Article 2(1) of Council Decision 

98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities 
regarding  draft  legislative  provisions1,  as  the  draft  law  contains  provisions  relating  to  the  stability  of 

Ireland’s financial system and the Central Bank and Financial Services Authority of Ireland (hereinafter 

the ‘Central Bank’). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the 

European Central Bank, the Governing Council has adopted this opinion. 

1.   Purpose of the draft law 

1.1  The draft law proposes amendments to the National Pensions Reserve Fund Act 2000 (hereinafter 

the  ‘2000  Act’),  and  provides  that  the  Minister  may  give  a  direction  to  the  Commission  of  the 

National  Pensions  Reserve  Fund  (hereinafter  the  ‘Fund’)  to:  (i)  invest  in  specified  securities  of  a 

credit institution whose shares are admitted to trading on a regulated market; and (ii) underwrite or 

otherwise  support  the  issue  of  any  kind  of  securities  of  a  credit  institution  whose  shares  are 

admitted to trading on a regulated market, where the Minister is of the opinion, after consulting the 

Governor  of  the  Central  Bank  and  the  Irish  Financial  Services  Regulatory  Authority,  that  this  is 

necessary to remedy a serious disturbance in the economy or to prevent potential serious damage to 
the financial system in Ireland2. The draft law authorises the Minister to direct the Commission in 

relation  to  the  holding,  management,  exercise  of  voting  rights  attaching  to  and  disposal  of  such 

investments. Under the draft law, a ‘credit institution’ is defined broadly to include an undertaking, 

1  
2  

OJ L 189, 3.7.1998, p. 42.  
Section 8 of the draft law. 

 
 
 
 
                                                 
other  than  a  credit  union  or  friendly  society,  whose  business  it  is  to  receive  deposits  or  other 
repayable funds from the public and to grant credit on its own account3.  

1.2  Under  the  draft  law,  the  value  of  a  shareholding  or  other  interest  held  by  the  Minister  that  is 

transferred  to  the  Fund  shall  be  taken  to  be  in  satisfaction  or  part-satisfaction  of  the  Minister’s 
obligation to make payments into the Fund4. Commencing in 2001 and continuing until 2055, the 

2000  Act  requires  the  Minister  to  pay  into  the  Fund  a  sum  equivalent  to  1 %  of  Ireland’s  Gross 

National Product. Under the 2000 Act, the Fund is established under the ownership of the Minister 

and the management and control of the Commission for the purpose of meeting as much as possible 

of  the  Exchequer’s  cost  of  social  welfare  and  public  service  pensions  to  be  paid  from  2025  until 
2055 or later5.  

1.3  The draft law also provides for consequential amendments to other provisions of Irish legislation in 

order to facilitate the making of directed investments in credit institutions by the Commission or an 
investment vehicle established by the Commission6.  

1.4  The background to the draft law is the Irish Government’s announcement on 11 February 2009 of 

the recapitalisation terms to be offered to two leading Irish credit institutions, Allied Irish Bank and 

Bank  of  Ireland.  Under  the  terms  of  the  recapitalisation,  the  Government  would  provide 

EUR 3.5 billion  in  core  Tier  1  capital  to  each  credit  institution,  in  return  for  which  the  Minister 

would receive preference shares with a fixed dividend of 8 % payable in cash or ordinary shares. 

These  preference  shares  can  be  repurchased  at  par  up  to  the  fifth  anniversary  of  the  issue  and  at 

125 % of the face value thereafter. The Minister can appoint, in total, 25 % of the directors to both 

credit institutions and would also receive 25 % of total ordinary voting rights in respect of change 

of control and board appointments. The State would have an option in five years to buy ordinary 

shares at a predetermined strike price, which according to the Government provides the State with 

the  potential  for  a  significant  return.  Of  the  total  EUR  7  billion  to  be  invested  in  the  two  credit 

institutions, EUR 4 billion would be funded from the Fund’s current resources while EUR 3 billion 

would be provided by means of a frontloading of the Exchequer contributions to the Fund for 2009 

and 2010. According to the Irish Government’s announcement, the Government does not intend to 

take control of these credit institutions. 

3  

4  
5  
6  

Section 2 of the draft law, which cross-refers to the definition of ‘credit institution’ contained in the Central Bank Act 
1997, which in turn cross-refers to the definition of credit institution contained in the European Communities (Licensing 
and Supervision of Credit Institutions) Regulations, S.I. No 395/1992. 
Section 6 of the draft law. 
Section 18(1), (2), (6) and (7) of the 2000 Act 
Sections  5  and  9  of  the  draft  law.  These  include  the  disapplication  of  certain  requirements  of  Irish  competition  and 
takeover law in respect of an acquisition or proposed acquisition by the Commission or a Commission investment vehicle 
of  an interest  in  a credit  institution, clarification  that  the  Commission  and  any Commission  investment  vehicle  are  not 
subject to  the  Irish  regulations  implementing  the  Markets  in  Financial  Instruments  (MiFID)  Directive and  that nothing 
done by the Minister or the Commission for the purposes of a directed investment in credit institutions constitutes a re-
organisation  measure  for  the  purposes  of  the  Irish  regulations  implementing  the  Directives  on  the  reorganisation  and 
winding-up of credit institutions and insurance undertakings.  

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2. 

General observations 

2.1  As stated in several ECB  opinions on draft national laws relating to emergency measures  arising 

out  of  the  current  financial  turmoil,  including  the  recent  opinions  regarding  such  measures  in 
Ireland7, it is important for national authorities to coordinate their responses to the current financial 

situation  with  their  EU  partners.  Given  the  similarities  of  the  causes  and  consequences  of  the 

financial crisis across Member States and the potential interdependencies of policy responses, the 

ECB  refers  to  the  conclusions  adopted  at  the  Ecofin  Council  meeting  on  7 October  2008,  which 

highlighted common principles to guide the action of Member States as follows: (i) interventions 

should  be  timely  and  the  support  should  in  principle  be  temporary;  (ii)  the  interests  of  taxpayers 

should  be  protected;  (iii) existing  shareholders  should  bear  the  due  consequences  of  the 

intervention; (iv) the government should be in a position to bring about a change of management; 

(v) management should not retain undue benefits; (vi) governments may have, inter alia, the power 

to  intervene  in  remuneration;  (vii)  the  legitimate  interest  of  competitors  must  be  protected,  in 
particular through the State aid rules; and (viii) negative spill-over effects should be avoided8.  

2.2  On  12 October  2008,  the  Heads  of  State  of  the  euro  area  issued  a  ‘Declaration  on  a  concerted 
European  action  plan  of  the  euro  area  countries’  (hereinafter  the  ‘Declaration’)9,  in  which  they 

confirmed  their  commitment  to  act  together  in  a  decisive  and  comprehensive  way  to  restore 

confidence and the proper functioning of the financial system, with the aim of restoring appropriate 

and  efficient  financing  conditions  for  the  economy.  They  agreed  on  common  principles  to  be 

followed  by  governments,  central  banks  and  supervisors  to  avoid  national  measures  adversely 

affecting  the  functioning  of  the  single  market  and  the  other  Member  States.  Such  coordinated 

approach includes initiatives aimed at providing additional capital resources to financial institutions 

and  recapitalisation  of  distressed  banks.  The  European  Council  endorsed  these  principles  for  all 

Member States on 16 October 2008. Against this background, the ECB highlights that all initiatives 

put in place by national governments to restore confidence in the financial markets should be aimed 

at  implementing  such  common  principles,  in  the  spirit  of  close  cooperation  with  other  Member 

States and EU institutions. 

3. 

Specific observations 

3.1 

Recapitalisation proposals 

3.1.1 

In line with the Declaration, Member States must act in a coordinated manner to avoid significant 

differences in national implementation having a counter-productive effect and creating distortions 

7  

8  

9  

ECB Opinion CON/2008/69 of 17 November 2008 at the request of the Irish Minister for Finance on a draft Financial 
Services (Deposit Guarantee Scheme) Bill 2008, ECB Opinion CON/2008/48 of 15 October 2008 at the request of the 
Irish  Minister  for  Finance  on  a  draft  Credit  Institutions  (Financial  Support)  Scheme  2008,  and  ECB  Opinion 
CON/2008/44 of 3 October 2008 at the request of the Irish Minister for Finance on a draft Credit Institutions (Financial 
Support) Bill 2008. 
See  the  press  release  of  the  2894th  Council  meeting  (13784/08),  available  on  the  Council’s  website  at 
www.consilium.europa.eu. 
The Declaration is available on the French Presidency’s website at www.ue2008.fr. 

3 

 
                                                 
in global banking markets. The Declaration acknowledges the need to work in cooperation with 

the ECB to ensure consistency with the Eurosystem’s management of liquidity and compatibility 

with its operational framework. Against this background, the ECB reiterates that uncoordinated 

decisions  among  Member  States  should  be  avoided  as  they  may  lead  to  a  fragmentation  of  the 

euro area  money market. In this respect, the  ECB  makes the following observations, which are 

important from a monetary policy perspective, as regards the proposed recapitalisation measures. 

3.1.2  The  ECB  notes  that  the  recapitalisation  measures  considered  in  Member  States  are  aimed  at 

strengthening  the  capital  position  of  fundamentally  sound  financial  institutions,  in  order  to 

improve the functioning and stability of the banking system and to ensure the proper financing of 

the  economy.  In  particular,  a  consistent  approach  should  be  used  in  defining  the  conditions  for 

recapitalisations and the pricing of the instruments intended to provide Tier 1 capital to financial 

institutions.  The  ECB  underlines  the  importance  of  appropriate  pricing  for  recapitalisations  to 

reflect the goals of enhancing the stability of the financial system, facilitating a return to normal 

market  conditions  and  ensuring  the  proper  financing  of  the  economy.  Against  this  background, 

the  ECB  has  published  recommendations  on  the  pricing  of  recapitalisations  (hereinafter  the 
‘Recommendations’)10. The ECB highlights that the pricing conditions for capital support should 

be  risk-based  and  market-oriented,  determined  by  taking  into  consideration  the  specific  risks 

related to both the specific instrument chosen for injecting capital and the institution concerned. 

Specific  features  of  the  instruments  for  capital  injections  (such  as  preference  shares)  should  be 

appropriately  chosen  so  that,  while  encouraging  an  early  end  to  the  State’s  capital  support  of 

banks, they should not result in an excessive increase in the cost of capital.  

3.1.3 

In  line  with  the  Declaration,  the  ECB  emphasises  that  harmonisation  regarding  the  expiry  of 

national  financial  support  schemes  across  the  EU  and  in  particular  within  the  euro  area  is  of 
crucial importance. Furthermore, in line with previous ECB opinions11, it should be ensured that 

such  measures  are  in  accordance  with  the  requirements  of  Community  competition  law,  in 

particular State aid rules, and that the State’s role as shareholder is limited in time. In this respect, 

the  announcement  by  the  Irish  Government  on  11  February  2009  states  that  the  Government’s 

recapitalisation  proposals  have  been  designed  having  regard  to  the  European  Commission’s 

Communication  entitled  ‘The  recapitalisation  of  financial  institutions  in  the  current  financial 

crisis:  limitation  of  aid  to  the  minimum  necessary  and  safeguards  against  undue  distortions  of 
competition’12 and are subject to EU State aid approval. The announcement sets out certain terms 

for the repurchase of the preference shares at par in the two credit institutions concerned up to the 

fifth anniversary of the issue and at 125 % of the face value thereafter. While the Government has 

10 

11 

12  

See  the  Recommendations  of  the  Governing  Council  of  the  European  Central  Bank  on  the  pricing  of  recapitalisations 
issued on 20 November 2008, available on the ECB’s website at www.ecb.europa.eu. 
See, e.g., paragraph 3.1.3 of ECB Opinion CON/2009/3 of 8 January 2009 at the request of the Slovenian Ministry of 
Finance on a draft decree laying down criteria and conditions for the implementation of State capital investments and for 
the  conversion  of  State  claims  into  capital  shares  under  Article  81.a  of  the  Law  on  public  finance  and  ECB  Opinion 
CON/2009/6 of 26 January 2009 at the request of the Danish Ministry of Economic and Business Affairs on a proposal 
for a Law on State investments in credit institutions and a proposal for a Law amending the Law on financial stability. 
OJ C 10, 15.1.2009, p. 2. 

4 

                                                 
 
 
made clear that it does not intend to take control of these two credit institutions, the State would 

have  an  option  to  buy  ordinary  shares  in  five  years  at  a  predetermined  strike  price  that  would 

provide  the  State  with  the  potential  for  a  significant  return.  In  accordance  with  the 

Recommendations,  the  ECB  considers  that,  while  the  pricing  and  other  conditions  of  capital 

injections  should  protect  the  interests  of  taxpayers  by  ensuring  an  equitable  return  on  public 

investment, terms should be set on the redemption of the instruments so as to retain the temporary 

nature of the State’s involvement and to discourage financial institutions from maintaining such 

involvement for an extensive period of time.  

3.2 

Role of the Central Bank Governor 

The  Central  Bank’s  role  in  relation  to  the  Fund  will  be  limited  to  providing  advice  through 

consultation with the Governor on the directed investments of the Fund. The ECB considers that 

this advisory role of the Governor is consistent with the Governor’s overall powers and functions 

with respect to the stability of Ireland’s financial system under the Central Bank Act 1942. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 25 February 2009. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

5